The European Union has made a long way during the 2 years of debt crisis. Learn what's behind and what's ahead on the road by reading the articles and interviews that the FXstreet.com team wrote as part of the special content The European Debt Crisis Chronicles.
It seems the Spanish "financial aid" has been futile to calm market as well as the Eurogroup €100 billion bailout for Spain as the market just gift a couple of hours of relief on Monday. On Tuesday, the yield on Spanish 10-year bond spiked to 6.80%, the highest level in the euro era, despite the fact that markets continue extending gains. This way the country's yields moved even closer to the psychologically significant 7% level at which Greece and Portugal had to seek international bailouts.
“The most-likely scenario is that the rising yields pull down sentiment, which would put further pressure on yields," says Jamie Coleman from Forex Live in a short news. "Could be at 7% in a flash,” the psychologically significant 7% level at which Greece and Portugal had to seek international bailouts.
Spanish yield has closed the session at 6.72% for 10Y bonds, with a spread of 529 pts. At the same time, Italian 10Y bonds closed at 6.16% with 473 spread, Ireland at 7.54% with 611 spread and Portugal at 10.6% with 925.
Later in the European afternoon, Fitch Ratings published a press release with the decision to downgrade 18 Spanish banks including the Catalan CaixaBank, the most strengh "Caja" in the country and Spain's third largest financial institution.
Fitch downgraded 18 Spanish banks' Long-term Issuer Default Ratings (IDR) and 15 banks' Viability Ratings (VR).
The rating actions are primarily based on the downgrade of the Spanish sovereign. In the official release Fitch adds that "Spain is expected to remain in recession through the remainder of this year and 2013 compared to the previous expectation that the economy would benefit from a mild recovery in 2013".
"Their [all domestic banks] revenue generation capacity, risk profile, funding access and cost of funding are highly sensitive to the evolution of Spain's economy and its housing market. The sovereign rating acts as a cap for the Long-term IDRs of these domestic financial institutions," stated the Fitch paper.
The rating agency already downgraded the country's credit rating by three notches to BBB last Thursday, following up with the rate cuts of the country's two biggest banks: Santander and BBVA.
Meanwhile, Austrian Finance Minister Maria Fekter played down her comments made during a television interview on Monday night when she suggested that Italy could be asking for a bailout shortly, which the EU might not be able to provide.
Italian PM Mario Monti reacted to her remarks saying that “It is totally inappropriate for ministers to comment on issues referring to other countries, and as such I won't comment her comments.” Later on Tuesday Fekter told reporters that she does not see any signs of Italy asking for EU funds.
G20 seeks to beef up IMF aid fund
Mexico will aim at this weekend G-20 summit for greater monetary cooperation towards the International Monetary Fund in order to build confidence in the fund's capacity to shore up European debt concerns, President Felipe Calderon said Tuesday.
Mexico's Calderon showed his most optimistic side, saying the G20 will put a package in place for EZ, "G20 gathering will seek to strike deals to strengthen financial institutions including IMF and help create EU firewall to help countries meet their obligations" he said.
"Mexico is seeking the adoption of a plan of integrated, comprehensive, long-term action that will go include, and go beyond, measures to confront and resolve the European crisis," Calderon added.
Deposit guarantee makes the market happy
Markets began the day with mix sentiment but the ECB put the salt in the sentiment with the deposit guarantee scheme as option to refief debt concerns in the Euro area. According to the ECB's new financial stability report, "breaking the link between banks and sovereigns – which significantly exacerbates the impact of any financial disturbance – also by establishing a European deposit guarantee scheme and resolution arrangements,"
Euro bonds on the June 28-29 meeting table
"We want Europe and we want more Europe, but I want a Europe that is sure that joint liability and joint controls lie hand in hand," Angela Merkel.
Joerg Asmussen said that eurozone bonds are "natural" but Merkel demands for instituting fiscal controls. EZ must integrate further into fiscal and political union, "We must first have fiscal controls over spending and then we can talk about sharing debt," stated Asmussen.
"In a fiscal union, Euro bonds are a natural element, but the process is important," pointed Asmussen.
Jyrki Katained, Finland PM, consider as alternative that only countries with "at least a single A" credit rating would be allowed to hold Euro bonds and the benefits would be shared to the rest of the area. "It might push yields down and benefit many other countries," said Katainen.
On the other hand, German Fin ministry Schaeuble believes that "Euro bonds would set wrong incentives" and he sees that the bloc "need shared decision-making before sharing debt."
Euro leaders are setting the positions to discuss Euro Bonds outlines and the process to reach closer fiscal and political union at their June 28 and 29 meeting.
Lagarde: Eurozone just have three more months
In an interview for the CNN on Tuesday IMF chief Cristine Lagarde said that the Eurozone had three months left to solve its problems, otherwise a breakup would ensue. Last week billionaire investor George Soros indicated a similar deadline.
The IMF head advised a gradual and continuous reduction of the EU countries' fiscal deficits, emphasizing that it does not have to be done through harsh austerity measures. Lagarde refused to predict whether Greece would leave the euro, claiming that “It’s going to be a question of political determination and drive.”
Nevertheless, European governments have already started preparations for the possibility of a Greek exit, as uncertainty is growing before the Greek elections Some of the measures considered by the Eurogroup Working Group include the suspension of the Schengen agreement, imposing limits on cash machine withdrawals and capital controls in Greece.
EU officials have been conducting conference calls in the last few weeks in order to agree upon the strategy in case Greece leaves, although they emphasize that it might not happen at all and that the plans they are devising are just preparations for an eventuality.
Fitch rating agency warned on Tuesday that more EU countries could be downgraded soon if the situation did not improve and suggested that a third ECB LTRO program would be implemented if Greece left the euro.
Meanwhile, another EU Member State Cyprus suggested on Monday that it also might be needing a bailout soon, as the developments in Greece have severely damaged its banks. The country will most probably apply for aid at the end of June, just before taking over the EU presidency for the next six months.
