Spain Plans on Asking for €100 bn in Bailout Money

The Spanish government is now seeking bailout money from the European Union. After struggling for weeks to come to a solution about its troubled banking sector, Spain is set to ask Eurozone finance ministers for bailout money on Saturday evening. To receive the money, Spain will have to continue to abide by current deficit rules in the European Union.

Luis de Guindos, the Spanish finance minister, is prepared to announce Spain’s decision tonight at a news conference in Madrid. After the announcement is made, the Eurozone’s finance ministers plan to announce their support for up to 100 billion euros in bailout money. It is still undecided where the bailout money for Spain will come from. The Eurozone currently has a European Financial Stability Facility that possesses 440 billion euros in rescue funds.  They also have a 500 billion euro fund known as the European Stability Mechanism. An official at the EU has stated their belief that bailout money could come from a mixture of both funds.

The International Monetary Fund plans on backing the bailout program with its technical knowledge and expertise. It will currently not be providing any funding to Spain at this time. This approach is quite unlike the bailouts the IMF carried out with Greece, Ireland and Portugal. Part of the reasoning for this is the IMF’s bylaws. Its rules state that it cannot grant assistance if the money is only going to banks and not the government. IMF funds are intended to provide governments with bailout money and are not given out to the private sector.

Since Spanish bailouts are only going to the banks, Spain will be able to avoid the austerity measures that bailout money is normally accompanied by. This decision was reached after finance ministers discussed the various options via conference call. Eurozone ministers want to act before the banking sector issues its June 21 report. They want to avoid having Spain destabilized during next week’s elections in Greece.

Only a little over one day ago, the International Monetary Fund published a report totaling 77 pages on the Spanish banking crisis. The report detailed the need for Spain and Europe to take action faster to inspire confidence in the markets.

Jest yesterday the euro dropped to 0.3 percent. It finished at $1.2521. After the gains made on Thursday, this fall was expected by investors. Reports of a Chinese rate cut fueled investors to turn to the dollar and euro until the Chinese renminbi settles down.

Expat Currencies Fall

For most of the ongoing Eurozone crisis, the expat currencies of South Africa, Canada, Australia and New Zealand have managed to hold their own amid a troubled marketplace. Banks in these countries have managed not to have the same kind of fiscal problems as banks in Spain, the United States and Ireland. The Australian dollar has been tied to the Chinese currency due to their trade and proximity to the country. With news of Chinese currency depreciation, the Australian dollar may suffer in future days.

For most of the last century, New Zealand, South Africa and Australia have had their currencies propped up by the commodities they sell. These include wheat, wool, oil and gold. The last year has been a difficult one for these antipodean currencies.  Buyers in India, China and European have seen their own economies suffer and cannot make as large of commodities purchases as they once did. Analysts believe that these nations may raise their interest rates during the next year in order to strengthen their currency.

Part of the issue is fueled by the drop in Chinese manufacturing. As these factories hit an economic slowdown, Chinese consumers will demand less Australian-made products. If this trend continues, the Australian dollar will be negatively impacted. Chinese growth has slowed by 7.5 percent. Although this number is far less than Europe’s, it still shows signs that China is facing a recession. The question on investors’ minds is just how bad the landing will be for China. If China’s economy drops faster than expected, politicians are ready to step in to lower interest rates and increase growth. The yuan is currently dealing with its worst performance for the last five years.

Overall, the current winner on the Forex market is the United States dollar. The dollar is close to a two-year high against the pound. Until the European Union develops more stability, it seems like safe haven currencies will enjoy a period of appreciation.