Last evening the bond rating company S&P reduced the ratings of Spanish sovereign debt toward the junk level. As might be expected, this proved bearish on the euro versus the USD, taking the pair down close to the 200-day SMA at 1.2825. Then it bounced and has since rallied to the 1.2940 area.
Why the rally? Some claim the Spanish downgrade is bullish on the euro because it hastens the day when Spanish PM Rajoy will throw in the towel, and surrender to Frankfurt’s austerity rules.
This makes no sense. Why would such a move be euro friendly? Spain acquiesces to the Teutonic rules which, judging by the Greek example, causes an economic death spiral. As a reward for the new austerity rules, Draghi and the ECB will shower Spain with euros and bank credits, increasing the money supply. Such actions would be demeaning to the euro’s value.
The Spanish PM is also objecting to what he perceives as a change in the terms of the June agreement. According to an Evans-Pritchard article in The Telegraph:
“This means sticking to its June summit deal to clean up legacy debts from banking crises in Spain and Ireland, preferably with a pan-EMU deposit insurance scheme.
Mr Rajoy and French president Francois Hollande seized on the warning, demanding the AAA core stands behind its pledge to let the ESM recapitalise Spain’s banks directly. “We have to show we’re serious people and that we do what we say we are going to do,” said Mr Rajoy. Germany, Austria, Finland, and Holland reneged on the accord two weeks ago .”
There is a meeting scheduled between the leaders of Spain, France, Italy and even Portugal. With the IMF now moderating it’s views that the extreme austerity makes economics worse, the Mediterranean Club is headed for a conflict with the Northerners.
There are those who think that Spain, instead of jumping through all the hoops, might just leave the euro. This week, Matthew Lynn in his Column London Eye had some interesting comments:
“When will there be a Spanish bailout — a request for emergency aid from Prime Minister Mariano Rajoy that will trigger intervention by the European Central Bank to start buying on bonds on a massive scale?
But they may have missed the real story.
Instead of a bailout, there could be an opt out. In other words, the Spanish might decide to quit the euro rather than submit to the demands of an EU-led rescue package.”
Spain does have a varied economy. Exports account for 27% of their GDP, about the same as either France or the UK. Much of the Spanish trade is to Latin America where the economies are growing faster than in Europe.
Perhaps overlooked is the diversity of the Spanish economy. For example, in 2011 combined car and truck production in Spain, at 2,353,682 exceeded the production in either France or Canada, Britain, or Italy. Here in Ireland, supermarkets are loaded with quality food products, as well as wine from Spain.
Spain has a massive real estate glut, and the Spanish bankruptcy laws are not conducive to reducing the price to a market clearing level. Change the price to pesetas rather than euros, and there would be a wealth of real estate and other business activity. It is probably best not getting too excited about a pending Spanish bailout request.
The rally in the euro has taken it back to the 1.2950 area where we suggested selling yesterday. No change in ideas, but manage your money cause these markets are dancing around for no obvious reasons.
Crude oil, it seems, is being discovered in many places. Providence Resources from Dublin Ireland reported an oil field in the Celtic Sea which may have as much as 280 million barrels of reserves. Each platform with the new horizontal drilling techniques could pump 100,000 barrels a day. Ireland produces no oil, and consumes about 140,000 barrels a day. With petrol currently €1.70 a litre, let’s get the drills going.
Written by CashBackForex.com