Euro slumps on renewed Spain concerns

5th January 2012, Comments 0 comments

The euro slumped to a 16-month low against the dollar Thursday after Spain rekindled concern about the magnitude of its banking sector problems and a French bond auction failed to reassure markets.

The euro slumped to $1.2831 shortly after the bond auction in France sold its planned amount of long-term debt at modest increases in yields but with demand down considerably despite banks being flush with cheap money from the European Central Bank.

The shared European currency also dived to an 11-year low against the safe-haven Japanese currency to strike 98.58 yen, while European stocks slid across the board.

Spain's new economy minister said Thursday that banks may face up to 50 billion euros ($65 billion) in bad loan provisions and he vowed to crack down on regional deficits in a new austerity drive.

Economy Minister Luis de Guindos' estimate of the banks' bad loans, provided in an interview with the Financial Times, was higher than many private forecasts.

"If you take international valuations as in the case of Ireland, at the most you are talking about the need for 50 billion euros of extra provisions (for Spanish banks)," De Guindos said.

"In the great majority of cases, they can provide it themselves from their profits, and it could be done not in one year but over several years."

The European Banking Authority said in December that Spain's five biggest banks required an extra 26 billion euros in capitalisation.

The euro renewed its slide against the dollar on heightened concerns that the eurozone debt crisis -- which has already resulted in bailouts for Greece, Ireland and Portugal -- could also strike the far-larger economies of Spain and Italy.

"Investors are increasingly jittery that the fragile banking sector in Spain could prompt the need for external support," said analyst Nick Stamenkovic at RIA Capital Markets, adding that the euro "looks set to test $1.25 soon".

Financial markets were also underwhelmed by the outcome of a French bond auction, held under the shadow of France possibly loosing its top triple-A rating.

The French treasury agency announced Thursday it had raised, as expected, 7.963 billion euros in bonds maturing in 2021, 2023, 2035 and 2041.

The yield on 10-year bonds rose slightly in France's first offer of long-term debt this year, to 3.29 percent against a rate of 3.18 percent during the last similar operation on December 1.

However demand was lower, with a bid to cover ratio of 1.64, almost half of the 3.05 it was in the December auction.

"The uncertainty over the sovereign debt situation remains, alongside fears that key nations such as France could soon lose their triple-A credit rating is a constant drag on the euro's prospects," said City Index analyst Joshua Raymond.

Standard & Poor's has threatened to downgrade most of the eurozone if it judges the measures European leaders decided upon to strengthen fiscal discipline are sufficient to help resolve the debt crisis.

"The French bond auction this morning saw decent demand but rising yields showed a deterioration in investor confidence in France's ability to maintain its top notch credit rating," added Raymond.

The French auction, following a German 10-year bond auction on Wednesday that saw barely sufficient demand, dispelled any hopes that the half a trillion euros the European Central Bank pumped into banks last month would bring easy relief to the sovereign bond markets.

The ECB last month provided eurozone banks 489.2 billion euros in three-year loans at 1.0 percent interest in a bid to avert a possible credit crunch.

Following the last similar operation during the global financial crisis, banks used a considerable portion of the money to buy sovereign bonds, helping keep government borrowing rates low.

European stock markets also took a beating, with Madrid's IBEX 35 index losing 1.97 percent to 8,414.40 points and Milan's FTSE-Mib diving 3.26 percent to 14,827.87 points.

Frankfurt's DAX 30 slid 0.60 percent to 6,074.26 points, the CAC 40 in Paris shed 1.08 percent to 3,158.65 points and London's FTSE 100 lost 0.75 percent to 5,625.44.

© 2012 AFP

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