Fitch Downgrades Spanish Debt
The Swiss National Bank is struggling to keep the franc from appreciating too much. Investors have bought up francs in the last month as the Eurozone crisis increased. The franc is viewed as a safe haven currency. Amid the current economic turmoil around the world, investors have flooded the Swiss market in search of a safer currency alternative. In response, Swiss reserves have increased to 303.8 billion francs from just 237.6 billion francs in the month of April.
For the last six months, the Swiss National Bank has not switched its approach greatly until the month of May. After elections in Greece and reports of failing banks in Spain, the SNB decided to take action. Most of the currency reserve increase at SNB is caused by measures taken by the Swiss to inhibit the euro from dropping beneath 1.20 francs.
Analysts believe that some of the increase of Swiss reserves can be attributed to more purchases of the euro and appreciation of other currencies it currently holds. Back in September of 2011, Swiss banks began taking action against an appreciating franc. At this point in time, the two currencies were almost at parity. The Swiss National Bank set the 1.20 franc to euro limit in an effort to combat inflationary forces. Investors are speculating that this floor may be broken. The euro was trading at 1.2010 francs today.
Fitch Downgrades Spanish Banks
Spain’s long-term Issuer Default Ratings has been downgraded from an ‘A’ rating to a ‘BBB’. For short-term Issuer Default Ratings, Fitch downgraded Spain from ‘F2’ to ‘F1’. Part of this can be attributed to the costly restructuring that banks in Spain will now face. Fitch believes that the Spanish restructuring will cost somewhere between 6 percent and 9 percent of their GDP. This totals out to 60 billion to 100 billion euros.
Fitch also chose to downgrade Spain due to their recession. Fitch had previously believed that the economy would start to benefit from a recovery by early 2013. They have revised their forecast to include a Spanish recession for the remainder of this year and 2013.
The Spanish government is suffering from financing issues for its own fiscal operations. Finding financing options and selling government bonds has become increasingly difficult in recent months. Without external financial support, Fitch believes the Spanish government will find it difficult to restructure their debt. If the government continues to maintain its high level of indebtedness, they may suffer from the same kind of crisis like in Greece.
Fortunately, Spain has had a far better than expected bond auction. On Thursday, Spanish bond rates fell to 6 percent. Analysts had previously been concerned about the rising cost of Spanish bonds. Anything over the 7 percent boundary was believed to signal an imminent bailout of the Spanish government. The falling interest rate has come as a relief to bankers who were worried about a Spanish bailout or fiscal collapse.
The auction’s success was fueled in part by investors’ belief that the Eurozone may step in to help Spain resolve its fiscal insolvency. Other analysts believe that counting on policy makers and politicians to figure out a way out of the crisis is a risky option.
The dollar rose today as a result of a speech by the Federal Reserve Chairman, Ben Bernanke. Although Bernanke did not state that there would be a stimulus, he reiterated the banks support to protect the economy. In the last few weeks, investors had put off buying or selling dollars as they awaited Bernanke’s response. His relaxed attitude showed that the Federal Reserve was not yet in a crisis mode. The Federal Reserve will step in if a crisis occurs, but they are not at a crisis level yet. After the speech, the euro was down 0.1 percent at $1.2557.
Earlier in the day on Thursday, the euro reached $1.2625. This marks the highest level for the euro since May 23. Against the yen, the euro has now reached 100.61 yen. After reaching this level, it fell to 99.94 yen which is still 0.4 percent higher than the previous day.
Surprises from China
China surprised investors by cutting borrowing costs. This is part of an attempt to stop a possible Chinese recession. Chinese banks will be able to have better flexibility and can choose the deposit rates they charge. Combined with stimulus measures, the rate cut should help China to protect its markets from global weaknesses and stimulate growth.