Finance Watch

1 July 2012 Ian MacFarlane, director, JC Rathbone Associates
With the Greek crisis now ‘on hold’ while the new coalition government sort themselves out, Spain has taken the spotlight in the ongoing Eurozone woes.

Spain’s borrowing costs rocketed through 7.10% yield (10 year bonds) in mid-June on the back of the fragile banking system, rising debt and the worsening economic situation.

This was compounded by Moody’s recent downgrade of 28 Spanish banks, hot on the heels of the Spanish government’s own downgrade to just above junk status, causing further panic in the markets.

However, the position has calmed a little since the EU summit agreed to allow Spanish banks access to up to €100bn from the EU bailout fund. We are led to believe by Spanish prime minister Mariano Rajoy that this is not a bailout for the Spanish government but for the Spanish banks, although we suggest that the rest of the EU think that it is, especially Angela Merkel!

Ten-year Spanish bonds are now trading around 6.3%, but the deep-seated economic problems are still to be addressed. There is a widespread belief that this bailout may be a prelude to full scale assistance to the Spanish state. We hope this is not the case, as this will surely spark a very real and present danger of contagion.

Meanwhile in the UK, the worsening state of the eurozone is rightly causing more serious concern for the economy and encouraging the Bank of England to unveil a further round of quantitative easing (QE). Last month the Bank’s monetary policy committee voted 5-4 in favour of leaving policy unchanged, but current estimates suggest that a minimum £50bn is on the cards in July, increasing the current total to £375bn.

This QE will join two other recent government initiatives to get the economy going, including ‘funding for lending’. This is a government scheme that will provide up to £80bn of liquidity, in exchange for collateral, at below market rates that will be linked to banks’ lending performance to the UK nonfinancial sector.

Te other idea, outlined in the recent Financial Stability Report, recommends a tap on bank reserves. It is suggested that banks are holding a far greater amount of liquidity reserves than required and will be encouraged to lend this additional money to support lending in the UK economy.

Speaking of the banks, they are continuing to suffer some particularly bad press at present and deservedly so. Suffice to say that the timing of this gross misconduct by the banks could not have come at a worse time, when we are relying on them to play a significant role in the UK’s economic recovery.

This page was last updated on:
13 July 2012.

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