Euro at Two Year Lows

The euro has no hit two-year lows. It dropped beneath the $1.25 barrier amid concerns over Spanish banking problems. Bankia, the fourth largest bank, is requesting money from the Spanish government. Markets are reacting to this request by dropping the euro and fleeing to safe havens like the dollar and the franc.

Credit Downgrade

Troubled banks in Spain took a further hit on Tuesday. Egan-Jones cut their rating for the Spanish government again. This credit rating cut is the third rating cut in the last month.

As a result of the credit downgrade, the yield on Spanish bonds rose. Since the euro was created in 1999, the spread between German and Spanish bond yields have reached their highest levels. Part of this rise is attributed to the recapitalization of Bankia. The Spanish government is attempting to sell off enough government bonds to keep Bankia and the Catalonian province from failing. If the government continues to have financial trouble, the ten year bonds could rise higher than 7 percent.  Bond rates higher than 7 percent could increase the total number of bonds sold to profit-eager investors. If the bond rate does not rise as high, market investors could begin to see some consolidation.

Throughout the day Monday, the euro dropped 0.6 percent to $1.2464. It reached a session low of $1.2461 during the day. This number is the weakest the euro has been since July of 2010.  Compared to the yen, the euro also fell 0.7 percent to 98.97. Earlier, it had fallen to 98.91. This rate was the lowest since January of this year.

The Performance of the Dollar

In comparison, the dollar dropped to 79.38 yen. This rate is a 0.1 percent fall that brings it closer to the three month low of 79.002. Part of the drop in the dollar can be attributed to the recent consumer confidence report. United States’ consumer confidence has now fallen to the lowest level for the last four months. This drop was unexpected for investors and brought with it an accompanying decrease in the value of the dollar. Not everything was bad news for the dollar. The dollar rose to a high against the Swiss franc. It reached 0.9633 which is a 15 month high for the dollar.

Spanish Banking and Greece

For a couple of days the euro improved. This appreciation was short-lived. The reports that pro-bailout parties were expected to win in Greece caused a short rise in the value of the euro before it dropped again. This time, the drop in the euro is attributed to Spanish banks instead of a Greek exit.

Spanish banks are having a difficult time reigning in their debt. In addition to having a lack of money to fund daily business, the banks are further endangered by a property slump in Spain. As Madrid tries to fix the banking crisis, the Spanish property slump will make Madrid’s efforts even more difficult.

Ten Year Bonds to Go Higher?

Spanish ten year bonds are still circling around 6.5 percent. In the past, Eurozone nations who required a bailout did so after the bonds hit the 7 percent mark. If Spanish bonds reach that level, investors see a bailout as inevitable. The debt crisis in Spain has pushed three and six month forecasts for the euro down to $1.15. Prior to this, analysts had set the three to six month euro rate to $1.20. As more news comes out about Spanish banking issues, euro expectations have fallen further.

The Spanish banking crisis is led by Bankia. Bankia requested bailout money totaling 19 billion euros. The Spanish government has already given the bank 4.5 billion euros to prop it up. Mariano Rajoy, the prime minister of Spain, is attempting to finance the bailout without any aid from outside of the country. His goal is to revive Spanish banks, but investors are uncertain if Spain can fix their banking problem without using outside funding. Analysts believe that Spain will need the European Central bank to buy up their bonds. Significant quantitative easing is also expected to help the situation in Spain. Until the debt crisis is solved, the euro is going to continue to be undervalued. Once the banks are recapitalized, the euro should rise in value once again.