The Eurozone has agreed to provide a bailout to the Spanish banking sector, but this EU solidarity has done little to calm the markets. The Euro has slumped to a two-year low against the US Dollar ($1.2082) and is at its weakest against the Yen for 11 years (¥94.37).
On Friday, one of Spain’s 17 regions, Valencia, approached the central government for financial support and on Sunday, Murcia admitted it may also need help. An €18 billion fund has been established to help the regions. Other regions are also thought to be likely to ask for help.
Ibex, the Spanish stock market, fell by 5% on Monday and the yield on Spanish 10-year bonds rose to 7.59%; a new high for Spain in the Euro-era. This contrasts with the situation in Germany where the yield on its 10-year bond fell to 1.13% - consequently the spread between German and Spanish 10-year bonds is also at a record level.
The Spanish economy contracted by 0.4% in Q2, following on from a 0.3% contraction in Q1. The fear that Spain will require a national bailout (the Spanish authorities have been at pains to explain that the €100 billion bailout is for the banking sector and not the nation) is said to be driving sentiment against the Euro.
Greece’s ability to honour its commitments under its two bailout agreements is again being questioned as the troika of EU, IMF and ECB representatives, embarks on another assessment mission as mandated by the terms of the accord. There is some doubt that Greece will be on track with tax increases and spending cuts following on from the instability caused by the two general elections held in May and June.