The financial markets reopen this morning after the extended Jubilee weekend pretty much where they closed last week with the euro under pressure.
Where the markets have been open over the last two days, the focus remained firmly cantered on Spain’s escalating problems. Yesterday, G7 central bankers and finance ministers held an emergency conference call amid rising fears about Spain’s fourth largest lender Bankia which currently has a €23.5 billion black hole on its books but failed to make any action and, for the first time, Spain’s treasury minister warned that the higher borrowing costs seen last week are, in effect, shutting the country out of financial markets.
Spanish Premier Mariano Rajoy said the country is “in an extremely difficult situation” and called on Europe to stand by the mutual obligations of euro membership. “Europe must say where it is going and show that the euro is an irreversible project that is not in danger, that helps nations in difficulty,” he told Spain’s senate. Despite the pleas, Spain’s leaders are holding out against a formal EU-IMF rescue along the lines of the bail-outs agreed over the last two years to rescue Greece, Ireland and Portugal, calling instead for EU action to recapitalise Spanish banks, something that to date the German leadership has refused to contemplate.
Today sees the European Central Bank (ECB) hold its monthly rate setting meeting. An announcement will be made at lunchtime and followed by the usual press statement from ECB head Mario Draghi. In a Bloomberg poll of economists yesterday, 25% felt there was a chance that the ECB would cut interest rate in an effort to bolster growth throughout the euro zone.
Tomorrow is the turn of the Bank of England (BoE) to make its monthly announcement amidst speculation of a £50 billion increase in the BoE’s asset purchasing program known as Quantitative Easing (QE) and even a possible interest rate cut from the historic low of 0.5% following the calls from the IMF amongst others last week. Ahead of the meeting, PIRC, the shareholder advisory group are warning that the UK’s banks are sitting on a £40 billion black hole of undeclared losses that are preventing them from making vital loans to businesses and households. Its analysis of the 2011 accounts of the UK’s top five banks show the Royal Bank of Scotland (RBS) was in the worst condition with £18 billion of undeclared losses that would wipe out more than a third of its capital buffer and potentially force the 82% state-owned lender back to the taxpayer for another rescue. HSBC had £10 billion in undeclared losses; Barclays £6.7 billion; Standard Chartered £3.6 billion and Lloyds Banking Group £3.6 billion.
The dominant theme in the markets remains risk aversion and so demand for the safe haven dollar continues to increase as fears over Spain intensify. The dollar index, which measures the US currency against a basket of six major currencies, climbed again despite the dollar receiving a setback on Friday after the publication of much weaker than expected US jobs data.
Meanwhile, the Reserve Bank of Australia (RBA) cut its key benchmark interest rate for the second month in a row, this time by 0.25% to 3.5% amidst fears of a global economic slowdown as the euro zone sovereign debt crisis intensifies. Data from its main trading partner, China also continues to be poor.