Spanish Bank Bail-Out Agreed
Spain became the fourth Eurozone member to seek the EU’s bailout. After Saturday’s conference call, the Eurozone finance ministers’ group announced it will lend up to €100bn to Spain to recapitalize its banks, in a bailout that puts no new reform conditions on the Spanish government – something that Spain has been negotiating for in the last few weeks. The funds would be administered through the government’s Fund for Orderly Bank Structuring and so would add to Spanish government debt. The IMF which will help administer the funds will not be lending any money to Spain which is unlike the bailout programs in Greece, Ireland and Portugal. The Spanish government will make a formal request only after reviewing the bank’s audit reports and it remains uncertain if the funds will come from the European Financial Stability Facility or its successor safety net, the European Stabilization Mechanism, as under the latter, such funds are senior to existing government bonds held by private sector investors so bond markets may still feel pressured due to the negative dilution effects. Nevertheless, the weekend announcement removes one immediate source of concern for the euro about Spanish banks. So we may see EURUSD bid up on Monday morning in Asia initially. But we have to see how the sovereign bond markets and credit ratings react to the ‘limited’ bail-out that will still raise Spain’s debt-to-GDP ratios. Moreover, the risks from Greece’s elections on June 17 keeps us bearish on the euro. Elsewhere, data in China for May remained mixed with a soft CPI print of 3.0% y/y, industrial production growing by 9.6% y/y and the retail sales growth falling to 13.8% y/y from 14.1%. The trade data however beat estimates with exports growing by 15.3% and imports by 12.7% which should be offer some support to the Australian dollar. The money supply and the new loans due this week will lend further color on the state of the recovery in the biggest emerging economy. The Canadian dollar remained unimpressed by the May labour market data. The 7.7k rise in employment was a shade above the 5.0k consensus and followed two strong prints for April (+58.2k) and March (+82.3k), but the bulk of the May employment gain (+6.3k) was in the part-time component, forcing the market to seek inspiration elsewhere. Ahead today, BoC’s Carney speaks at the Montreal Conference.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank