Spain seems set to ask the EZ for a Bailout at the UK deficit widens

Week Commencing Monday 24th September 2012

Overriding Market Themes

UK public sector net borrowing has hit a new record high of GBP 14.4 billion in August, according to the Office of National Statistics, constituting the biggest deficit for the month since records began. The deficit was not helped by a marked decline in corporation tax receipts and a sharp rise in benefit payments. This is naturally bad news for Chancellor George Osbourne, as it means the UK Government is now more likely to fail to achieve its aim of wiping out the structural deficit by 2015. Labour politicians are set to have a field day at the next Prime Ministers Questions, and will no doubt claim that the government’s economic plan is failing. Is it? Well, it is true that the government were fqr too optimistic about the prospective levels of growth in the UK economy during 2012 – 2014, however I doubt even the gloomiest economists predicted that the Eurozone crises would continue for the length of time it has. Ultimately, it seems that the government is not off tract, just proceeding down the track very slowly. 


Spain is looking set to request a EUR 60 Billion loan from its Eurozone partners, according to the countries second biggest bank, BBVA.  A report detailing independent stress tests of the Spanish banking sector is due to be published at the end of this month, and will likely be the catalyst for any decision to apply for a bailout. A preview however is available and is making sour reading for Spanish bankers and politicians who now view a bailout as the only way to secure Spain’s financial system from collapse. Would this potential bailout be any different than those in Greece, Ireland and Portugal? I doubt it. Spain would in all likelihood continue to have access to its own bond markets and perhaps have more ‘wriggle room’ with the troika than their other European counterparts. All that aside however, with a U-turn like this I doubt Prime Minister Mariano Rajoy’s position will be safe for long.


It seems that even South Korea, one of the Far East’s success stories is not immune to the global economic woe. The International Monetary Fund has cut its growth forecast, indicating that risks from further intensification of the Eurozone will continue to effect the exporter into the medium term. The fund expects a growth of 3% for this year, although impressive by European standards, this is down from its initial projection of 3.25%. The country is currently engaged in a round of economic stimulus, including a tax break on incomes and purchases of new homes, whilst also pledging to invest over USD 1 billion into banks to boost lending. 

GBP This Week

This should be a quiet week for Sterling with only current account release on Thursday to be concerned about. I expect the difference in value between imported and exported goods, services, income flows and unilateral transfers during the previous quarter to be slightly higher, potential at the GBP -12.2 Billion level. This should have a negative effect of Sterling into the second half of the week, potentially reversing the gains we have seen in GBP/USD to the 1.60 level once again. 

USD This Week

We start the week with CB Consumer Confidence in the US, with the market expecting a small increase in confidence in the economy as we move into Q4, potentially moving the index to 62.9 from the previous level of 60.6. Wednesday sees the release of the New Home Sales report, which should come in relatively flat against the previous release, perhaps tending to a small growth over the month. Finally, on Thursday we have the Core Durable Goods Orders and Unemployment Claims figures. Durable Goods should fight back from the -0.6% lows we saw last month to a more respectable 0.2% for August. Unemployment Claims I doubt will move massively, with perhaps with a small reduction in the number of people claiming benefits.

EUR This Week

We kick start the week on Monday with the German Ifo Business Climate index, which should come in flat against last month’s figure at 102.6. Then on Tuesday, we see the ECB President Mario Draghi speaking at the annual event "Day of the German Industries" organised by the Federation of German Industries, in Berlin. Finally, Thursdays Italian 10 Year Bond Auction will finish off the Euro week, with yields expected to come in around 5.82.

In Other News

Winter has official arrived as winds and rain batter most of the UK. The 60 mph winds are set to tear through the North of England and South of Scotland, while other areas should see 80 mm of rain, adding to fears of flooding in both the South East and West. It also seems rain clouds are forming over John Terry’s head too, with his announcement that he is retiring from international football. The defender has had a rough couple of years, and was just recently cleared at Westminster Magistrates Court in July of racially abusing Anton Ferdinand during a Premier League game. 


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