The Euro is trading at 2-week lows close to 1.2835 against the Dollar with mounts of pressure above the unique currency. On Wednesday, the Eurozone is facing a lot of problems coming from Spain, Greece and some leaders quoting divergences in opinion. The debt costs in Spain have risen around 31 bps to break above the 6.0% level and close the day at 6.08% for the 10Y bonds.
Interesting to see 10-year bonds level above 6% when this morning Spanish Primer Minister Mariano Rajoy said in an interview that he was ready to seek a bailout if its debt financing costs stayed too high for too long. Speculations talk that Spain could request EFSF/ESM assistance as early as the October 8 Eurogroup meeting. But Mariano Rajoy refuses to give a date.
"While neither the Rajoy government nor Germany are keen to act so soon, the ECB may be anxious to get a programme done and dusted while market conditions remain relatively benign, and seems willing not to push for maximum conditionality," points Chris Walker from UBS. "We view euro dips in the coming weeks as temporary, because timely OMT activation could further boost risk assets and EURUSD."
Walker also comments on Financial Times recent report "that the Eurozone's current deal over the bank bailout deal ruled out the ESM being allowed to provide recapitalization for 'legacy assets'." According to a joint release of German, Dutch and Finnish finance ministers, "ESM bank recapitalizations should 'only apply to new cases' and called for banks to use the ESM only as a last resort. If implemented, there will be speculation over the ultimate burden of recapitalization for Spain's current financial system could ultimately end with the sovereign."
Meanwhile Greece and Spain are weighing sentiment with strike and riots. Spain remains in the eye of the storm as Congress was surrounded on Tuesday by people claiming against budget cuts and the politicians squander money at the same time. Reports across the world says that demonstrators are against budget cuts, but recent news about Rajoy spending a lot of public money with friends didn't help the sentiment in Spain.
Numbers aren't helping Spain either, Spain deficit rose to €50.1B YTD in August, the 4.77% of GDP. Two basic points above the 4,5% deficit target for the whole 2012. The deficit has risen 23,8% YoY from the same period of 2011.
European stocks have fallen hard on Wednesday. The FTSE 100 fell 1.55% to 5,768.70 pts. The DAX lost 1.93% to 7,281.90, the CAG 40 collapsed 2.44 to 3,427.98 and the IBEX35 dropped 3.76% to 7,867.80.
Draghi: Actions from governments must follow OMT
The Outright Monetary Transactions program (OMT) has removed unfounded euro fears and eased market concerns, ECB President Mario Draghi said Tuesday. Speaking at a conference in Berlin, Draghi stated that ECB measures can only be a bridge to a more stable future; however, he said that OMT does not solve underlying debt crisis and government measures must follow.
Mr. Draghi reiterated that the euro is irreversible and that recent upturn in sentiment strengthens rather than weakens EU governments' commitments to reform.
ECB President said that he has "enormous respect for the Bundesbank", and many ECB members share similar concerns. He goes on saying that ECB actions don't represent financing states.
