Why The Euro Retraced On Spain
After all was said and done, market participants ultimately failed to see anything good about the recent bailout to Spain during today’s session. Over the weekend, European finance ministers decided to lend out 100 billion euros ($125 billion) in emergency funding to Spain – in order to assist the country with its currency banking sector troubles. However, the question now arises of how this will be implemented. But, even more pressing seems to be other considerations that may make the announced bailout complicated.
According to official European releases, the $100 billion will be backed by European Union funding – ultimately being funneled through the Spanish banking bailout fund mechanism – dubbed FROB. However, the question remains as to whether the funds will be directly dispersed through the ESM or the already existing EFSF. A disbursement through ESM may take a while as the emergency bailout fund hasn’t even begun commencement of operations. This isn’t expected to begin until next month. As a result, the timeline makes it highly likely that Spain won’t be getting any definitive funding until July or August at the earliest.
Moreover is the fact that the region’s triple A rated countries will likely demand high grade collateral before any disbursement can be made. The four in question are Finland, Germany, Netherlands and Luxembourg. Finland’s own representatives have already expressed their desire for collateral before any bailout disbursements are made. The issue of collateral, like the debate of issuance through ESM or EFSF channels, will hold negotiations up for at least the next two months – not a good thing for a banking system that looks to recapitalize in the near term.
Now that a fourth EU nation has fallen to calls for a bailout, Euro bears are likely to turn their attention to Italy’s economy and its shortcomings. Investors are already beginning to take notice, with yields on benchmark bonds rising from 5.75% on Friday to over 6% in today’s session. The longer the European saga continues to remain at the forefront of the global investment community, the Euro still seems to be a good sell.
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