FXSTREET : “European Debt Crisis Worries”

Currencies Direct April 30th 2012 - 4 minute read

FXSTREET : “European debt crisis worries renewed after a
week dominated by bad news from the area”

Standard and Poor’s announcement on Thursday
that it had downgraded Spain’s credit rating to BBB+ caused European stocks to
open in the red on Friday. Nevertheless they turned from negative to mixed
sometime later, while the Euro recovered the 1.3200/10 area after falling to a
3 day low.

The Spanish risk premium grew to 436 points
on Friday and the yields on the country’s 10-year bonds again rose above the 6%
threshold. As a result of contagion Italy saw its risk premium increase to 400
points while the yields on its 10-year bonds surged to 5.8%.

S&P downgrades Spain by 2 notches to BBB+

At the NY close, Standard and Poor’s rating
agency downgraded Spain to BBB+ with outlook negative. The country is just two
notches away from entering ‘junk’ territory. S&P cut on Spain was mainly
caused by bleak growth prospects, as pointed out by FXstreet.com on a special
Spanish crisis report over the weekend.

According to S&P official statment:
“We have lowered our forecast for GDP to contract in real terms by 1.5% in
2012 and 0.5% for 2013.” Further S&P: “In our view, the strategy
to manage the European sovereign debt crisis continues to lack
effectiveness.” Kneejerk reaction is a 30 pip decline in EURUSD.

Netherlands reaches budget deal

The Dutch parliament has reached a surprising
budget breakthrough which will see the country bring down the budget deficit to
around 3% of its gross domestic product in 2013. The ground breaking news comes
just days after the Dutch government collapsed failing to agree on it.

“Parliament has shown a very constructive
attitude,” Outgoing Dutch Minister of Finance Jan Kees de Jager said. While
Dutch entrepreneurs’ organisations first reaction was of optimism, stating that
“a courageous step by Dutch politics,” labour unions were disappointed.

“Seven weeks of negotiations between
VVD, CDA and PVV (Party for Freedom), that supported the coalition, brought no
deal and resulted in the fall of the Dutch government on Monday. But in two
days De Jager got a deal together with the help of parties on the left that
produces almost the same level of budget cuts” comments Market News
International.

The Netherlands has now until next Monday to
send its 2013 budget plan to the European Commission in Brussels.

Double dip recession hits UK

Preliminary UK GDP data released on Wednesday
surprised to the downside, showing that British economy contracted by 0.2% in
the first quarter of 2012, following a 0.3% decrease in the previous quarter.
The general expectation was for a slight increase of 0.1%. This means that the
UK has entered into its second recession since the onset of the financial
crisis.

“QE will now need to come back to the table
to support the stuttering economy, despite last week’s hawkish minutes which
suggested a move away from QE,” predicts Phil McHugh, senior analyst from
Currencies Direct. “The credibility of the Government’s fiscal plans will now
come into question as underlying growth suffers. In addition the developments
in the eurozone look increasing gloomy as an external threat to future growth
in the UK, which will impact performance of the pound throughout 2012.”

Draghi calls for boosting growth in the EU

On Wednesday the ECB President spoke before
the Committee on Economic and Monetary Affairs of the European Parliament. He
suggested that money and lending growth might remain subdued in the nearest
future, until the general economic situation improves.

Mario Draghi pointed out that lending was
still weak and stressed the importance of the banks strengthening their resilience
further. He referred to ECB’s LTRO operations which alleviated banks’ tight
funding needs and helped monetary policy transmission.

“Our LTROs have been quite timely and
successful, he said. “If the only thing we had achieved is to buy time, which by
the way is not the only thing we achieved, we would have been successful. I
think buying time is not a minor achievement.”

The ECB head also emphasized the importance
of the Eurozone nations combining their efforts to achieve financial stability,
as the central bank’s principle responsibility is maintaining price stability,
not dealing with imbalances. He said that the best way to stimulate growth is
through structural reforms and assured that the painful austerity measures
which are now being introduced will give positive effects in the longer term.

“We’ve had a fiscal compact. What is most
present in my mind now is to have a growth compact,” he said.

Moody’s: Collapse of Dutch government a
credit negative

The Dutch Prime Minister Mark Rutte and his entire
Cabinet resigned on Monday after failing to agree on plan to reduce the
country’s deficit as told by EU rules. Rutte talks on a new austerity package
collapsed over the weekend. The outgoing PM Rutte will be speaking at 2pm
Tuesday in the Hague.

“Rutte is to debate with parliament Tuesday
on whether and how his caretaker government can still improve the budget, and
when to schedule new elections. No date was immediately announced, but
opposition lawmakers called for a vote in late June” AP said.

Meanwhile, amid the prospects of political
and budgetary uncertainty to find 9.5 billion euros ($12.6 billion) of
additional cuts in the 2013, Moody’s warned after the US close that the
government collapse is credit negative for the country.

 

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