Global Currencies and Interest Rates- Spain Needs Life Boat- Spainsh Banks “RAGE”; Roubini Spain should Default NOW

 

• Spain will need rescue according to Merrill - "Spain's debt crisis may force the country to tap the EU-IMF rescue fund over the next two to three months and set off a political storm, according a confidential report by the Bank of America Merrill Lynch." London Telegraph
• Spanish banks “rage” at end of ECB 12 month liquidity tender - Spain’s banks have been lobbying the ECB hard to take action and alleviate the stress that will arise as a result of the 12 month expiration. Spanish banks accuse the ECB of “absurd” behavior by permitting the tender to expire. “Any central bank has to have the obligation to supply liquidity. But this is not the policy of the ECB. We are fighting them every day on this. It’s absurd.” FT 
• Greece - N Roubini oped in the FT this morning - says Greece should default now - “Greece’s best option is an orderly default.” The country’s austerity measures will impose cutbacks that are too large for its economy to bear. FT  
• ECB takes the place of the interbank market in Europe - The ECB is currently lending close to €900bn ($1,098bn, £728bn) to eurozone commercial banks, jumping to near-record levels since the creation of the central bank 11 years ago. The ECB has become a lifeline for some of Europe’s ~3K weaker banks. FT
   

Moodys warned of a possible downgrade to the country's maximum credit rating, highlighting the rapid deterioration of Spain's economy and public finances $EWP

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MADRID (Dow Jones)--Moody's Investor Service, the last major credit ratings agency to rate Spain Aaa, Wednesday warned of a possible downgrade to the country's maximum credit rating, highlighting the rapid deterioration of Spain's economy and public finances. The move follows Fitch Ratings' downgrade of Spain from the coveted top rating late last month. Standard & Poor's Ratings Service cut Spain to AA, two notches below the top rating, in April. Spain is grappling with the collapse of a decade-long housing boom that is weighing on the country's banks, has sent unemployment soaring to over 20% and opened up a double-digit budget deficit. Following the meltdown of Greece's public finances, jittery investors have become increasingly concerned about the problems in Spain, the euro zone's fourth-largest economy, prompting a widespread selloff of euro-zone

Big Picture Catalysts to Watch Coming Up in the next few weeks European Bank Stress Tests

Big Picture Catalysts to Watch Coming Up in the next few weeks – resolution on these issues would remove a major overhang for the market. 
· Financial Regulatory Reform – see the broader update. 
· European Bank Stress Tests – European bank stress tests - results could be published by mid-Jul - in an attempt to break the market panic that surrounded its banks and debt markets this week, the Bank of Spain said it would conduct "stress tests" of its banks and publish the results to the public.  The news took much of Europe by surprise and caused shock - while many other countries have been conducting similar tests on their institutions, no other major nation was prepared to divulge the specific individual results to the public.  However, at a European leaders summit on Thurs, the major countries of the EU, inc. Germany, said they would follow in Spain's footsteps and publish the test outcomes (the results are due to start hitting in mid-Jul).  Investors will be focused on two critical issues: 1) whether the assumptions underlying the tests are "credible" (i.e. are they

Spain's Foreign Ministry Monday condemned Israel's military action against an aid ship flotilla bound for Gaza

MADRID (Dow Jones)--Spain's Foreign Ministry Monday condemned Israel's military action against an aid ship flotilla bound for Gaza. Spain's government considers that the military action was "completely disproportionate, and fully supports the European Union query that Israel carries out an investigation, and that it finds out who's responsible," the ministry said in a release Monday. Naval forces stormed six ships bound for besieged Gaza with thousands of metric tons of aid and hundreds of pro-Palestinian activists on board. Israel said its forces were attacked by some of the activists and that both sides used live fire. At least 10 of the passengers were killed, Agence France Presse said earlier Monday.
-By Madrid bureau, Dow Jones Newswires, +34-91-395-8120, djmadrid@dowjones.com

CEEMEA Credit Strategy Update Reason for Cautiousness in CEE

Sound Core Europe debt conditions are a pre-condition for CEE-Periphery decoupling in credit spreads. The CEE region (EM) has decoupled from GIIPS (Greece, Italy, Ireland, Portugal and Spain) debt-dynamic concerns, as better and improving fundamentals have largely served to shield EM countries. In fact, the average of CDS levels have diverged in the past months, when GIIPS spreads have increased sharply (Chart 2). We notice that the pace of decoupling has slowed lately and, for example, iTraxx CEEMEA SovX has only partially recovered the previous widening (after the financial support to Greece by the financially strongest EU members – i.e., Germany and France). As shown in Chart 3, Core Europe or Core DM (Belgium, France and Germany) CDS lead the trend in EM CDS and also determine the direction. Therefore, the 175bp of spread between EM and Core DM likely will not guarantee a cont

Monitoring indicators of short-term liquidity very closely to detect any tension in (external) funding markets. Charts 4 and 5 show the relationship between the average cross-currency swap (CCS) basis in CEE (cross-currency swap basis of Poland, Hungary and Czech Republic*) and GIIPS and Core Europe CDS, respectively. We conclude that the external currency funding in CEE has not been materially affected by what is happening in peripheral European countries, but investors are likely increasingly wary about possible negative impacts of Core Europe debt deterioration (and exposure to GIIPS) on external funding markets. Wider Core European CDS spreads could cause additional concerns on global debt sustainability, implying a more negative CCS swap basis in CEE and signaling potential tightening of external funding conditions (R2 on levels between average CCS basis and Core DM CDS is 87% over the past two years).

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