Global financial markets are back in panic mode as investors begin counting the potential cost of Spain’s impending bailout. Madrid’s long-term borrowing costs surged to record highs following news that Spain’s regional supervisors have joined the queue for emergency loans, putting the government’s finances under even more strain.Reaction in currency markets was mostly one-way. The euro plunged to new lows while safe haven demand sent the US dollar and yen soaring. Sterling also suffered at the hands of the dollar, with the greenback’s trade weighted index rising to a two-year high.
Sterling
Sterling fell sharply against the US dollar having registered one-month highs just days earlier, after another spike in Spanish borrowing costs spread panic among investors. The growing likelihood of a Greece-like bailout for Spain is now leading a rush for safe haven currencies and highly rated government bonds. Subsequently, the pound also tumbled against Scandinavian units such as the Swedish krona with investors reassured by the region’s debt outlook and vast commodity reserves.
US dollar
The dollar’s trade weighted index, a broad measure of its performance, soared to a two-year peak as investors piled into assets offering maximum security from Europe’s debt woes. Spain has moved a step closer to an international bailout while it is expected that assessment in Athens could revive talk of Greece abandoning the single currency area. However, the greenback, now trading at fresh two-year highs against the euro, could possibly be forced to surrender some gains.
Euro
The euro sank to new lows and is in danger of further declines after Spain’s financial health monitor flashed red in financial markets. Madrid’s benchmark 10-year government bonds climbed above 7.5 per cent, hitting another new euro-era high; a sign of panic after Spain’s regional authorities joined the country’s banks in asking the government for emergency loans. Record high unemployment is expected to worsen the country’s public finances, which may lead to international authorities stepping in, according to most analysts, with Spain already paying around seven times more than Germany to borrow in debt markets.
Japanese yen
The yen rose to seven-week peaks against the US dollar with investors still concerned about the Federal Reserve’s monetary policy bias, which seems to be leaning towards more quantitative easing at present. The Japanese currency may get off to a slow start after China reported better-than-expected manufacturing data, dampening worries about global growth.