Spain To Find Other Way To Prop Up Bankia

The ability of the Spanish banking system to obtain some form of cheap funding was once again called into question as the European Central Bank has decided that the Rajoy government plans are non licet. Spain had hoped to directly take an equity stake in Bankia, the nation’s third largest lender, paying for it in Spanish government debt. Bankia could then take this debt and use it as collateral against loans from the ECB. It seems a rather back-door way of doing things and this is because the ECB is not allowed to directly finance sovereigns, hence the rejection of the plan.

How they haven’t been directly financing sovereigns via the SMP program (purchasing of Italian, Spanish, Greek and Portuguese debt) I don’t understand but, anyway, that plan is dead in the water.

The situation in Spain was compounded by the resignation of the central bank governor yesterday. He has been due to leave in 6 weeks’ time anyway so plans had already been made for a successor but the suddenness of the early departure shocked markets yesterday. At a time at which stability and consistency are at a premium, this undermined any that had been forthcoming. Chuck in a ratings downgrade on Spanish debt by the ratings agency Egan Jones and it was a rough day for Spanish assets all round.

EURUSD hit fresh 22 month lows as a result, breaking through the 1.25 level finally with GBPUSD seemingly homing in on the March lows of 1.5603 as a result of the pressure to buy USD. GBPEUR was a dead cross yesterday, trading above 1.25 for the session but with little fanfare.

The single currency wasn’t helped by a slip in German inflation that will open the door further for those who believe a rate cut may be forthcoming from the ECB next week. We will wait for today’s money supply data from the Eurozone before making an appraisal of the prospects.

Today will likely be all about bond yields. Spain’s have continued to push higher as the crisis within both the sovereign and banking markets have increased dragging other peripheral bonds (Italy in particular) back into the danger zone. While Spain does not  have a debt auction until June 7th, Italy will try and get away over EUR6bn of five and ten year debt this morning. Is the contagion once again lapping on the shores of Italy?

UK data comes in the form of M4 or broad money data with a contraction only going to add more fuel to the flames for those looking for further QE from the Bank of England.

Pressure remains on GBP versus the dollar today and we can foresee a move back into the 1.55s should EURUSD continue to slip lower.

Latest exchange rates at time of writing