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Month 33 of the Eurozone debt crisis

Month 33 of the Eurozone debt crisis

The toughest cuts in its economic history saw Spain endure a third consecutive quarter of contraction as its recession deepened. The eurozone’s fourth largest economy shrank 0.4% in the three months to June, deeper than the 0.3% experienced in the first quarter of 2012. Markets reacted to this news forcing Spain’s 10-year bond yields over 7.5%, breaching the level that forced Ireland, Portugal and Greece to seek external aid.

In an attempt to stabilise its stock market after sharp falls due to fears the country may need a bailout, Spain banned the short-selling of shares. Spain’s regulator blocked the practice for three months, with Italy banning the short-selling of financial stocks for one week.

Moody’s is to put the Aaa sovereign credit ratings of Germany, the Netherlands and Luxembourg onto a negative outlook is a reminder that northern European taxpayers are expected to pay the bills should Italy and Spain require greater bailouts. This leaves Finland as the only stable rated Aaa credit in the eurozone, whilst Moody’s will look at France and Austria by the end of September to see if they need to be downgraded.

Intensification of eurozone stresses saw the euro fall to its lowest level in more than two years. EUR/USD touched a low of $1.2067 before a modest recovery while GBP/EUR has consolidated above the €1.28 level.

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