As yields on 10 year bonds are flirting with the 7% mark, it’s a good opportunity to look at the high dependency on banks and the sovereign and vice versa, thanks to the LTROs.
The ECB’s long term refinancing operations initially lowered Spanish yields and helped the banks. Spanish banks took cheap loans from the ECB to buy higher-yielding Spanish bonds, sometimes with leverage. The idea was to lower sovereign yields and give banks an easy arbitrage. Reality looks different.
However, as worries rose in recent months, Spanish bonds fell (yields rose). So banks were stressed with these losses.
If Spain doesn’t lend a helping hand to the banks, they might sell their Spanish bonds in the markets to get more cash, and this will just add more pain on Spain.
External help is already promised in the form of the 100 billion bailout, but this will eventually add to Spain’s debt and will not be enough for the banks. A quicker solution is resuming the ECB’s bond buying scheme. Spanish Prime Minister Mariano Rajoy, who already suffered a huge humiliation with the bailout, is begging for ECB aid, and is so far denied.
Will the ECB recognize its big mistake and offer direct aid to Spain? It already did it in the past.
Spain and its banks are too dependent on each other. In the current environment, the credit rating downgrades for Spanish banks seem unnecessary: the banks in Spain are always safe.
When will the Gordic Knot be cut loose? Perhaps the Greek elections will be the beginning.
Further reading: 3 Scenarios for the Greek elections.
Get the 5 most predictable currency pairs
22 Comments
Pingback: EUR/USD June 14 – Limited Move Up as US Data Disappoints | Forex Crunch
Pingback: Chinese Official / Unofficial Figures Diverge – Hard Landing Seems More Real | Forex Crunch
Pingback: EUR/USD June 15 – At Strong Resistance on Hopeful Greek Polls | Forex Crunch
Pingback: EUR/USD June 18 – Sliding Lower as Greek Euphoria Makes Way for Spanish Suffering | Forex Crunch
Pingback: EUR/USD June 19 Weak German Data, Spanish Yields Unnerve Markets | Forex Crunch
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | One Currency Ltd
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | Forex Trader Website | The future of Forex is here…
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | Forex Sector News
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | Bullion Trade
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge - Smart Forex Broker
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | Forex Trading Hot
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | Currency Forex Center
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | Currency Trader News
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge - Latest Technology - News & Articles
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge - Forex News Advice | Forex News Advice
Pingback: EUR/USD June 20 Markets Hopeful for Further QE from Fed | Forex Crunch
Pingback: EUR/USD June 21 German PMIs Disappoint, No QE from Fed | Forex Crunch
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | Currency Forex News
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | Forex Trader Zone
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | Forex Currency Zone
Pingback: Guest Commentary: Chinese Official/Unofficial Figures Diverge | Forex Tip Trades