The outlook for the euro area remains uncertain and the risks are to the downside to growth and stability. The finance ministers this week offered more support to Spain to start by the end of the month facilitating the funds to the ailing banks and gave Madrid and extra year to balance the budget, but the market remains skeptic of the ability to contain the crisis!
The euro extended the losses to a fresh two-year low last week at $1.2162 as the outlook for the euro area remains uncertain. The lack of key data this week kept the focus on the deteriorating sentiment and the still slow policy response from officials.
The euro area finance ministers in the follow up to the EU summit reached the agreement on the Memorandum of Understanding for recapitalizing Spanish banks and are given till July 20 to finalize parliamentary procedures.
The number in specific for the overall bailout is not yet announced but in June when Spain approached the Eurogroup for assistance the finance ministers said up to 100 billion euros are available for Spain and Juncker said that as much as 30 billion euros will be ready by the end of July even for emergency if the banks needed before the assessment individually and the stress tests procedures.
Spanish Finance Ministers Luis de Guindos said that the money is needed for banks and expected that they would be disbursed over 18 months.
Spain was also granted an extension till 2014 to balance its budget from the EU Finance ministers. “Spain has been subject to an excessive deficit procedure since April 2009. The Council`s recommendation sets 2014 as the new deadline for bringing its deficit below the EU`s 3% of GDP reference value, with headline deficit targets of 6.3% of GDP for 2012, 4.5% of GDP for 2013 and 2.8% of GDP for 2014” the statement read.
Spain responded last week with new austerity measures and spending cuts to help reach its goal in time. Prime Minister Mariano Rajoy unveiled the fourth austerity plan in seven months and this time included more measures to balance the budget even after the EU extended the relief for Spain by extending one year to 2014.
Rajoy proposed an increase in the sales tax to 21% by 3 percentage points from the current 18%, removed the tax rebate for home buyers, cut back on unemployment benefits, and also consolidate local governments and dropped the year-end bonus for some public workers.
Rajoy also announced new indirect taxes on energy, and said may privatize ports, airports and railway assets.
The measures announced and the plan to 65 billion euros is higher than the expected of around 30 billion euros. The situation in Spain remains worrisome and the recession is only deepening with unemployment at 24.4% alongside rising borrowing costs that investors fear will only push Spain to ask for a sovereign bailout really soon especially after they reached above 7.0%.
All this and the market seemed still reluctant to believe that there is progress toward ending the crisis. The finance ministers delayed the discussion of the programs for Ireland and Portugal and even the bailout for Cyprus as again they remain behind.
Italy remains at risk as the finance ministers did not discuss the mechanism of allowing countries to access the market to buy bonds through the funds, which keeps Italy at the front line. Moody’s Investor Service downgraded Italian government bonds by two notches to “Baa2” and now two steps shy of “Junk” and the agency kept the door open for more downgrades from the rising pressure on Italy from funding or in the case of any political risk in Greece exiting the euro or Spain requesting more aid, which surely will push Italy off the cliff.
The market is unconvinced; the ECB rate cut did little to change anything to the market as they see the move was short of expectations with no broad bond buying and neither injecting more cash.
The outlook remains dark for the euro area indeed and only the unexpected can change the course. We always remained optimistic throughout the crisis and said a strongly policy response in a timely manner will change the course, but with the slow reaction from leaders, now we need the unexpected grand bazooka policy measures as their slow response allowed us to reach here and now they need to do the unexpected or accept the worse unexpected of deep depression and the slow exit of nations from the monetary union!
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