Tension in the EMU at the moment means that every large transaction or sale by a member state is closely watched. This afternoon for instance investor eyes were turned to Spain as the Government there completed a regularly scheduled sale of government bonds to raise capital.
The Spanish Government issued €2.5 billion in bonds in an auction that pretty much went smoothly. This might assure investors that the EMU debt crisis is under control for the moment: in the last day for instance the EURGBP exchange rate has gained to 0.85 cents while the EURUSD rate has almost tipped 1.35. This indicates the common currency is gaining strength.
On the other hand the Spanish Government was forced to pay hugely inflated interest rates on its bonds: 3.45% compared to 2.36% the same time last year. This indicates that investors are still aware that officials inside the EU have not devised a permanent solution to the debt crisis yet. The market expects they will do shortly.
In fact this afternoon the President of the ECB Jean-Claude Trichet has pushed for an expansion of the EFSF rescue fund ahead of a meeting of the European Commission on Friday. The Commission is expected to make the EFSF a permanent mechanism of the monetary union – but the ECB doubts this will receive sufficient funding to be effective.
Doubtless the market will be watching Friday to see what happens.
by Peter Lavelle with foreign currency exchange specialists Pure FX.
