Euro Stumbles After Poor Spanish Auction

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Spain was forced to pay nearly 200bp more than last month to finance its short term debt at its latest auction today. Spanish 6-month T-Bill maximum Yield rose to 3.369% vs 1.793% on May 22 while Spanish 3-month T-Bill maximum yield increased to 2.500% vs 0.879%. The bid to cover ratios were lower as well with three month diving to 2.6 from 3.95 the month prior while the 6 month saw coverage of only 2.82 versus 4.30 in May.

The latest auction results demonstrate the fragility of the country’s credit markets and put even more pressure on the EU summit later this week to address the issue of mutualization of debt in the region as financing needs become prohibitive. Spain is Europe’s fourth largest economy and as such could pose a terminal danger to the whole monetary union if it cannot come with a relatively quick solution to lower its cost of funds.

Der Speigel, the German weekly magazine just published an internal report from the finance ministry in Berlin claiming that a break up of the euro would lead to a 10% contraction in the German economy in the first year and would double the nation’s unemployment rate. Although Angela Merkel and a variety of other German officials vehemently oppose the idea of Eurobonds, markets are starting to force their hands as financing costs in Southern Europe become unsustainably expensive only exacerbating the region’s economic woes.

EUR/USD reacted quickly to the news dropping 30 points lower in the aftermath of the release but remaining within striking distance of the 1.2500 level as traders continue to hold out hope for the EU summit later this week. However, today’s auction data is likely to weigh on the pair and it could continue to drift lower to test bids at 1.2450 as the day proceeds.

Boris Schlossberg
Managing Director

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