Focus On Spain
News reports on Friday that Spain’s highly indebted state, Valencia, is set to seek the central government’s help to repay its debt led to heavy selling of the euro across the board. The Spanish government has already set up a EUR18 bn emergency loan fund to support the regions that are cut off from markets. The regions face about EUR15 bn of debt redemptions in the second half of 2012. Valencia’s announcement could put additional stress on the central government which is already suffering from its own funding problems. The Spanish government earlier cut its growth forecasts from +0.2% to -0.5% for 2013 and from 1.4% to 1.2% for 2014. We believe that even these forecasts are overly optimistic. Egan Jones cut Spain’s sovereign rating to CC+ from CCC+. We note that Moody’s has already placed Spain on review for a possible downgrade and that the sovereign is only a single notch away from junk status. With Spanish 10y yields well above 7%, risks that Spain may request a full-fledged EU/IMF bail-out are rising unless the ECB directly intervenes in the bond market. Italy, though in a better standing than Spain, has also seen its cost of debt rise with 10y yields now back above 6%. Meanwhile, negative 2y yields in the core sovereign bond markets show that capital flight from the Eurozone’s periphery is worsening. The Eurozone finance ministers’ approval of the Spanish bank bailout terms on Friday was as expected but did not help to calm the markets as the EURUSD fell to 1.215. The next big technical support level is at 1.187. With the troika’s visit to Greece on July 24, risks of further negative headlines from the Eurozone remain high and we remain bearish on the common currency.
Click here to read the full report: UBS Morning Adviser Asia
UBS Investment Bank