Spanish Banks' 'Bad Loans' Are At A Record High, Threatening Upward Move For GBP EUR Exchange Rate

Modified: Tuesday, 20 November 2012 17:09 BST - Written by John Cameron

STORY LINK Spanish Banks' 'Bad Loans' Are At A Record High, Threatening Upward Move For GBP EUR Exchange Rate

This morning’s session brought further bad news for the down-at-heel Spanish economy and for the euro. The latest Spanish ‘Bad Loans’ figures, released earlier, revealed that the combined volume of bad debt held by the troubled Iberian state’s retail banks climbed to a new record level in September. The weakening effect on the single currency by the release was mitigated by the fact that the EU/ECB are making some €100bn of new funding available to Spain’s ailing banking sector in the near-term. This meant that the GBP EUR exchange rate has held in a tight band either side of 1.2450 during today. However, looking at the situation from a medium term perspective, the heavy exposure of Spanish banks to bad loans spells very bad news for the euro. If the eurozone’s debt difficulties escalate early next year, then Spain’s banks look to be in some danger. The knock-on effect of a fully-blown Spanish banking collapse could prove catastrophic for the region at large.

Elsewhere in the eurozone, there was more worrying data released in Italy this morning. Weak domestic Industrial Orders and Industrial Sales numbers suggest that Italy’s real economy is beginning to suffer due to the stringent austerity measures which its technocratic leaders have imposed upon it during recent months.

The next risk event of note comes in the early hours of tomorrow morning in the form of the minutes of the most recent Reserve Bank of Australia policy meeting. With the RBA having surprised the markets in deciding against cutting domestic interest rates at the meeting in question, the potential exists that the minutes will contain a relatively positive assessment of the road ahead for both the Australian and the global economies. Such an outcome would be likely to see the GBP AUD exchange rate tumble back towards the 1.5000 level, whilst the US Dollar could weaken on improved risk sentiment. This would have the potential to send the GBP USD exchange rate back up through the psychologically significant 1.6000 level.

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