Euro’s longer term foreign exchange rate highly dependant on Spain

Published on January 10, 2011 by Currency News Editor   ·   No Comments

Europe’s longer term foreign exchange rate against other world currencies maybe highly dependent on Spain, as the euro tests recent low’s, the EU’s cash safety net may need to grow a few sizes bigger.
Spain is the eurozone’s fourth largest economy and would stretch the capacity of the EU financial safety net, the 440 billion euro ($570.8 billion) European Financial Stability Facility, to the limit if it had to be rescued.
“Spain has a serious, realistic chance of avoiding a programme because of the government’s actions to reduce the fiscal deficit, reduce public borrowing needs, make structural economic reforms and repair the financial sector,” a senior EU official said.
After months in denial, Spanish Prime Minister Jose Luis Rodriguez Zapatero’s minority Socialist government has acted to cut public spending, step up privatisation and bring forward a long delayed pension reform.
Nevertheless, bond market pressure is likely to be fierce, with investors fleeing peripheral eurozone sovereigns because of worries over their ability to repay their debts as interest rates rise, and fears of writedowns for bondholders.
EU officials are searching for ways to reinforce the eurozone’s financial backstop by increasing its effective lending capacity and broadening its scope for action.
Spain’s debt issues are indeed big, but Italy has a cool two Trillion of euro debt and has much worse debt statistics than Spain.
Italy’s debt-to-GDP ratio is 118% (as of 2009). Greece got in trouble at 116%. Italy’s deficit is smaller and has a high savings ratio. However, nobody focuses on that as Spain is in the limelight with a debt to GDP ratio under 60%. Should austerity measures result in a nominal GDP contraction in Italy, its debt stats will worsen very rapidly.