Spanish downgrade bad for EUR
The euro slipped to $1.3160 against the US dollar this morning, marking a 1¢ loss from yesterday. GBP/EUR fell to £1.2285, reaching a low last seen in June 2010. The euro looks set to remain on the defensive ahead of this morning’s Italian bond auction. The government is looking to issue 4-year, 5-year, 7-year and 10-year bonds and yields have already risen ahead of the auction.
S&P cut Spain’s sovereign credit rating for the second time this year, citing concerns over support for the banking system as the economy continues to contract. Spain’s rating was reduced by two notches from A to BBB+ with a negative outlook remaining. The trigger for a further downgrade would be the debt-to-GDP ratio rising through 80%. At present, the Spanish government expects the ratio to peak at 79% in 2012, but weaker growth or a larger than expected bank bailout could easily push it through the 90% level. 10-year bond yields jumped from 5.85% to just over 6% this morning but have now pushed back below that level.
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