The week is ending in a similar fashion to which it began, namely with markets broadly in retreat from risk. There’s little reason to feel that today will be much different. The focus is on Spain and its expected announcement of just how bad the government believes the bad loans situation is for the banking sector there. Meanwhile, Greece is still trying to stitch together a government from the results of the weekend’s election. But the verdict in markets for the week as a whole has been a distinct lack of belief in the course that is being taken in Europe, with regards to France and its intended push for growth, together with Greece and its appetite for continued austerity as well as Spain’s banking situation. Guest post Forex Broker FxPro Overnight, we’ve also seen slightly softer than expected retail sales and production data in China, although inflation was broadly as expected at 3.4%. Commentary Spanish bank risk. There is a growing feeling that the problems in the Spanish banking sector are too big for Spain to deal with. Today the Spanish government is expected to announce its view of the extent of the bad loan provisions that Spanish banks should make. Earlier this year, the government demanded that lenders raise their loan-loss provisions by a further EUR 54bn to EUR 155bn. However, according to the Bank of Spain, this will cover only roughly half of the loans made to property developers, without any provisioning for the huge EUR 1.45trln of mortgages and corporate debt on bank books. Some believe that proper provisioning for non-performing loans in these two categories would entail banks setting aside a further EUR 270bn. If the Spanish government attempted to fill this gap, it would lift the debt/GDP ratio from near 70% currently to around 120%. To make matters worse, local banks flush with ECB cash have increased their purchases of Spanish bonds by a third in recent months. As such, if bad debts at banks continue to grow (a given), and the government is forced to inject funds (money is does not have), then the public debt grows exponentially and the sovereign’s solvency is threatened, further undermining the bank’s position. With the economy stuck in a deep recession and borrowing costs quite elevated, Spain would rapidly find itself trapped in a deadly debt spiral, requiring huge financial assistance from the EU and the IMF. The frightening consequence is that, if the latter come to the party and helped Spain out it would virtually exhaust their financial resources. Little wonder that risk assets are tremulating once more. The Bank of England’s discomfort. Yesterday’s sterling price action reflected the fact that there were some prevailing expectations of an extension of the Bank’s QE program which were unfulfilled. Cable was modestly firmer on the release as shorts were covered. The no-change decision will have been guided by the quarterly Inflation Report due to be published next week. In this context, the Bank could well have a tough time explaining why once again it will be revising up its inflation projections and lowering growth. One of the primary issues is that the spare capacity in the economy (or output gap) that the Bank has consistently believed will pull inflation lower (or partially counteract the upward forces) has not been evident, or at least not to the extent that the bank has anticipated. As such, for the Bank to fundamentally shift its view towards further QE in the near future would signal that it has still not understood this structural change in the economy. By nature, the argument also weakens through time, as idle capital equipment decays and the long-term unemployed see their skills eroded. The other relevant factor is that Gilt yields themselves are pushing record lows this week. Of course, QE is not primarily there to push down yields, but rather create cash balances for those whom have sold Gilts to the Bank which are then recycled into the economy and other assets. Still, the move lower in yields does provide some offset to the weaker growth outlook that is likely to be presented. One thing is for sure, the Bank is in an uncomfortable position right now. Euro defying the inevitable? As we have been observing recently, it is remarkable that the single currency is not a lot lower. Consider that European leaders are now openly canvassing the possibility that Greece might be forced to leave the single currency; tumbling property prices in Spain represent a massive risk not just to the banking system and the sovereign but also threatens to absorb virtually all of the financial resources that Europe has set aside for such eventualities; and the head of China’s sovereign wealth fund has declared that they are not buying any more European bonds. And yet, despite all of this negative news-flow, the euro is only drifting downwards ever so slowly. It is a mystery wrapped up in an enigma. Could it be that a couple of sovereign wealth funds with extremely deep pockets, one from Asia and one from Europe, are hoovering up euros from the sellers in ‘unlimited quantities’? If so, is there a risk that these players ultimately decide to step back and allow the euro to find a more natural resting place? Because, it is clear to all that Europe needs a weaker currency right now to assist in the rebalancing process. FxPro - Forex Broker FxPro - Forex Broker Forex Broker FxPro is an international Forex Broker. FxPro is an award-winning online broker, offering CFDs on forex, futures, indices, shares, spot metals and energies, serving clients in more than 150 countries worldwide. FxPro offers execution with no-dealing-desk intervention and maintains a client-centric business model that puts customer needs at the forefront of our operations. Our acquisition of leading spot FX aggregator, Quotix, enables us to offer access to a deep pool of liquidity, as well as top-class order-matching and some of the most competitive spreads in the market. FxPro is one of only few brokers offering Negative Balance Protection, ensuring that clients cannot lose more than their overall investment. FxPro UK Limited is authorised and regulated by the Financial Conduct Authority (registration number: 509956). FxPro Financial Services Limited is authorised and regulated by the Cyprus Securities and Exchange Commission (licence number: 078/07) and by the South Africa Financial Services Board (authorisation number 45052). Risk Warning: Trading CFDs involves significant risk of loss. View All Post By FxPro - Forex Broker Other Forex Stuff share Read Next EUR/USD May 11 – Recovers from Lows on Greek Coalition Yohay Elam 11 years The week is ending in a similar fashion to which it began, namely with markets broadly in retreat from risk. There's little reason to feel that today will be much different. The focus is on Spain and its expected announcement of just how bad the government believes the bad loans situation is for the banking sector there. Meanwhile, Greece is still trying to stitch together a government from the results of the weekend's election. 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