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World Week Ahead Spanish rescue, Greek vote

Monday 11th June 2012

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Europe has agreed to help Spain by providing as much as 100 billion euros to bail out the nation's bleeding banks in the fourth—and largest—euro zone member rescue as the region's debt crisis continues to swirl.

“The Spanish government declares its intention of seeking European financing for the recapitalisation of the Spanish banks that need it,” Spanish Economy Minister Luis de Guindos told reporters in Madrid on Saturday.

"The loan amount must cover estimated capital requirements with an additional safety margin, estimated as summing up to 100 billion euros in total," a Eurogroup statement said.

Analysts were hopeful investors might respond well to the Spanish rescue.

"The figure of up to 100 billion is more encouraging and pretty realistic; it's an attempt to cap the problem," Edmund Shing, European head of equity strategy at Barclays, told Reuters. "The issue, however, is there is still a lack of detail about where the money's coming from, which is crucial. The market will treat it with some caution until they see how it will be funded."

The Spanish cry for aid comes ahead of Greek elections on June 17, which could potentially result in a new government and a decision to stop using the euro. Greece already has received two financial rescues, while Ireland and Portugal also have needed financial assistance from their EU partners.

Highlighting the risks and uncertainty because of the debt crisis, Moody's Investors Service warned on Friday that a Greek exit from the euro and a bailout for Spain might prompt credit-rating downgrades in the region.

All sovereign ratings in the euro zone, including the Aaa rating of nations such as Germany, would need to be reviewed if Greece left the euro, while the credit standing of Cyprus, Portugal, Ireland, Italy and Spain would deteriorate, according to Moody's. A 'Grexit' could trigger a demise of the euro itself, Moody's said in its statement.

The latest development—the extended hand to Spain—has put a positive spin on the situation for the moment. On Saturday US Treasury Secretary Timothy Geithner welcomed the euro zone's decision to assist Spain.

"We welcome Spain's action to recapitalise its banking system and the commitment by its European partners to provide support," Geithner said in a statement. "These are important for the health of Spain's economy and as concrete steps on the path to financial union, which is vital to the resilience of the euro area."

Just a day earlier, and as a sign of increasing impatience with the seemingly never-ending saga that is the euro debt crisis, US President Barack Obama called on euro zone leaders to act, saying the troubles across the pond are damping growth in the world's largest economy. What's becoming increasingly clear is that the failure of EU leaders to contain their crisis may be hindering Obama's chances for staying four more years in the White House.

“The sooner they act, the more decisive and concrete their action, the sooner people and markets will regain some confidence,” Obama said at a White House news conference on Friday.

Of course, Europe isn't alone when it comes to fiscal chaos. Standard & Poor's on Friday warned that political and fiscal risks in Washington may prompt another downgrade of the US credit rating, currently AA+, by 2014 and affirmed its negative outlook. However, it added that it was hopeful that rival lawmakers can secure a tax hike and spending cut accord to avert falling over a fiscal cliff.

Investors this past week have drawn confidence from signs that policy makers are ready to bolster expansion, with a surprise interest rate cut in China last week. While European Central Bank policy makers had discussed a decrease in the benchmark rate at the most recent meeting, they decided to keep rates steady for now, as did the Bank of England last week.

The Bank of Japan is not expected to announce new initiatives when it meets on June 14, though some believe policy makers might discuss overhauling its asset-buying program.

“Given failures in bond operations, the BOJ may extend the maturity of bonds as soon as this month,” Masayuki Kichikawa, Tokyo-based chief economist for Bank of America Merrill Lynch, told Bloomberg News. “If not this time, they will have to do it this year at least.”

In the past five days, the Dow Jones industrial Average climbed 3.6 percent while the Standard & Poor's 500 Index gained 3.7 percent and the Nasdaq Composite Index jumped 4 percent.

Europe's Stoxx 600 Index posted a 2.9 percent advance last week, while even the euro managed a gain. Last week, the euro rose 2.5 percent to 99.47 per yen, while climbing 0.7 percent to US$1.2517 for its first rise against the greenback in six weeks, according to Bloomberg.

The latest indicators for the US economy will come in the form of reports on producer prices and retail sales, both due Wednesday, and the consumer price index and initial weekly jobless claims the following day.

A host of euro zone countries are selling bonds this week including Germany, the Netherlands, Austria and Italy. The Netherlands will sell up to 2.5 billion euros of 2033 bonds on Tuesday, while Germany is set to offer 5 billion euros of 2022 bonds on Wednesday.

"Investors are still very long Germany and probably a bit too short the rest of Europe so any opportunity to close some of the shorts and have some good yield pick-up, I think it's a good buying opportunity," Annalisa Piazza, market economist at Newedge, told Reuters.

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