GBP/EUR at yearly high
The Euro is lower this morning as jitters over the European sovereign debt crisis continues. ECB Governing Council Member Nowotny tried his best to dampen concerns stating that he was not concerned about Spain as the government had taken the necessary steps to repair its finances. He added that there was no need for an additional LTRO at the moment, but this could change in the future.
The Spanish Prime Minister is scheduled to speak this afternoon at 1pm in order to explain the latest round of spending cuts. He is also expected to demand that regional governments share the burden in cutting spending. Spain’s borrowing costs have increased by over one percentage point since 2nd March when PM Rajoy announced that Spain would miss its 2012 budget-deficit target. Rajoy’s attempts to try to follow a milder fiscal adjustment path look to have spooked markets, even though he was over-ruled by EU officials in the end. 10-year yields have fallen this morning having peaked at 6.02% at the open they are now back at 5.92% that pullback could prove short-lived after Spanish industrial production fell by 5.1% in the year to February, confirming the slowdown in activity. The EU Commission is looking for Spanish output to fall by 1.7% this year, while consensus looks for a 1.2% decline. We suspect that it might be closer to 3% should the government be able to reduce the deficit from 8.5% of GDP to 5.3% this year.
Meanwhile, there are reports that Greek care-taker PM Papademos will call a snap election today at 3PM. With the Troika signing up to the latest programme and the PSI completed an election was always likely and reports in the Greek media suggest a date of 6th May. The question is whether the two main parties can actually formulate a majority and stick to the IMF programme they have pledged to undertake. A repeated series of elections could see promises on privatisation and tax collection unfulfilled leaving the IMF with little option but to fail Greece when it reviews its progress on 31st May.
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