Ever since the European Central Bank decided to implement unlimited bond buying back in September, there hasn’t been any follow through from troubled Eurozone nations. The finger has been pointed squarely towards both Italy and Spain – two countries that were anticipated to follow in the footsteps of Greece. But, it’s highly unlikely bailouts will be requested, especially given two main factors still at work between both economies.
No Need For A Bailout
One of the main reasons why Spanish Prime Minister Mariano Rajoy, nor his counterpart Italian PM Mario Monti, hasn’t formally requested a bailout is debt costs. Spain’s Treasury has been able to tap global bond markets for additional funding regardless of the fact that the economy continues to contract. And, the government agency has been able to do so at decreasing yields. Italy has been able to do the same, with the most recent auction seeing stable and healthy demand. In the most recent auction, which took place on November 14th, the Italian treasury was able to auction off 3 and 10-year bonds. Bond yields for 3-year notes fell to the lowest in two years, while raising $4.5 billion in funding. Meanwhile, the 10-year auction witnessed a drop in yield to 4.81%. This is lower than the 4.92% captured in the last auction, as demand for the security rose.
Lower bond yields mean declining government costs for both countries. This is in comparison to previously skyrocketing yields, circa 6-7% for both nations. And, lower costs means a lower likelihood that either Italy or Spain will need to request money from the European Commission.
Bailout Should Be A Good Thing
But it’s not just bond costs that are keeping both leaders away from a bailout.
In recent months, PM Rajoy has admitted to keeping Spain out of bailout talks with the European Commission on the basis that commitments and bailout terms must be productive for the Spanish economy. PM Monti has noted the same. Simply put, both leaders are looking to leverage their economy’s current state for better terms should a bailout be required. Until either leader feels comfortable that a Eurozone bailout won’t depress further economic growth, it’s not expected that either will request aid.
The inactivity will likely keep any meaningful bullish momentum in the EURUSD pair at a minimum. The notion will reinforce current resistance at 1.2840 and bolster the key 1.3000 psychological figure in the medium term.
Source: FXTrek Intellicharts