By: Dr. Mike Campbell
The shared currency of 17 EU member states, the Euro has fallen to fresh lows against the Yen and to recent lows against Sterling and the Dollar. The New Year’s brief flirtation with optimism in Europe (such as it was) has come to an end, to the surprise on none.
The trigger for the resumption of what seems like business as usual as far as the Euro is concerned was elevated borrowing costs for the Eurozone’s second largest economy, France. There had been considerable speculation towards the end of last year that France may lose its coveted AAA status. The rating indicates that, in the view of the ratings agencies, a AAA rated nation’s investments (in this case sovereign bonds) are of the highest investment grade. The threat to reduce the rating means that this conviction is no longer held by the agencies and consequently borrowing costs will rise. Whilst the French rating was assured at the end of the year, the outlook for the rating was determined to be negative, by Fitch’s, signalling that a downgrade was on the cards in the near(ish) future.
The yield that France had to pay for its ten-year bonds went up from 3.18 to 3.29% - whilst this is nowhere near the rates that Italy and Spain have been asked to pay (sparking fears of the need for further IMF/EU bailouts) it is a step in the wrong direction.
Concerns about a higher than expected bad loan cost to Spanish banks and recent troubles at Italy’s UniCredit sent banking shares across Europe lower by between 4.5 and 5.4% - UniCredit’s shares were suspended for the second time in as many days after a further 17% fall.
The Euro hit a fresh 11 year low against the Yen. It was fixed by the ECB at ¥98.67 yesterday afternoon. The Euro was at levels not seen since September 2010 against Sterling of £0.8252 and at a sixteen month low against the Greenback of $1.2780.