EUR USD (1.3090) Economic fears over Spain and Italy grippedinvestors on Tuesday as Spanish equities neared a three year low,Spanish yields went upward and Italian capital markets followed thesame pattern. A flight to safety was experienced as investors movedinto Bunds, gilts and US Treasuries. The word ‘austerity’ is no longerconfidence-inducing among market participants, who increasinglyseek policies to promote growth in the periphery. The ECB’s LTROprogramme has come into question even though it certainly ‘boughttime’ in a precarious situation last year and provided needed liquidityin February. However, the issuance of further LTRO money isconstrained due to shrinkage in the pool of eligible collateral and theever larger haircuts that would be applied as the Bank moves downthe eligibility ‘food chain’. Mario Draghi indicated in the most recentECB press conference that haircuts applied to the most controversialcollateral had reached as high as 75 percent. Furthermore, the LTROmoney that was issued to the periphery may already have migratedback to the core. This might explain why banks in the periphery havebeen constrained in their ability to buy their own sovereigns’ debt,allowing yields to drift higher again. So, solutions are not apparent. The euro remains vulnerable to a fall to 1.3025. As before, belowthere, it would find no good support ahead of 1.2805. To the upside,1.3165 and 1.3235 mark the first hurdles.
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