Tuesday, June 12, 2012

Effect of Spanish Bank Deal

The Spanish Bank deal has little effect. 

The European Finance ministers have agreed to lend Spain $125bn to recapitalize its banks (The actual amount has not yet been finalized).

The global markets have responded positively on Monday as global stock markets opened higher, although short lived. New York’s Dow Jones rose by 0.7% but closed at 1.1% lower. London’s FTSE 100 opened positively but closed at a loss of 2.7 points. French and German Indices remained stable while Nikkei (Tokyo) and Hang Seng (Hong Kong) closed up 2.0% and 2.4%.

Meanwhile, Fitch cut the credit ratings of two Spanish banks, Santander and BBVA, by two notches from A to BBB+. Last week, the rating agency reduced Spain’s bond rating. Fitch said that the current reduction is a reflection of its past week’s actions.

Global oil prices also fell amid fears of the Eurozone debt crisis and decrease in petroleum demand. US light crude fell by $1.40 while Brent crude fell by $1.47.

The Italian bond yields rose from 5.7% to 6% while Spanish bond yields came closer to 6.5%. In other words, Spain is still finding it difficult to borrow money, despite the bank bailout. Its lenders are still not confident, even though the EU has agreed to inject $125bn into the economy.

Greece’s elections

Another important factor that threatens the stability of the Euro is the Greek national elections, scheduled for next week, 17th June, which could potentially result in Athens leaving the Eurozone. The EU finance ministers are well aware of the situations therefore, the Spanish bank deal, when finalized, would be designed to be long term oriented.   

Fitch’s Forecast for Spain

The ratings agency gave a gloomy prediction for Spain as the country will “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 which directly affects the banks' volumes of activities in Spain". 

What is the Spanish Bank Deal? Click here to view the summarized post

Your comments and feedback are always appreciated
Sarfaraz. A. K.