(Updated below) The lack of confidence in the markets that the eurozone is dealing capably with the financial crises faced by some of its major member economies is being demonstrated in a steady fall of the value of the single currency, the euro, against the benchmark of the US Dollar.
As we write, that value has fallen to a new low of 1.2214 Bid price against the USD on Forex UK.
The rate fluctuates during day but the overall direction of travel is relentlessly downwards.
There was a brief respite in the fall, with a minimal recovery, following the apparent decision of the eurozone to establish a banking union and to bail out the Spanish bank directly, to the tune of €100 billion.
Supporting the troubled banks directly means that what they are lent is not added to the sovereign debt of Spain and therefore does not affect the country’s debt-to-GDP ratio nor, consequently, drive higher the rate of interest it has to pay on new borrowing.
What spooked the markets after this brief easing of the pressure on the euro was that the timescales of the eurozone plans are not what they had seemed; and that the Spanish banks may actually get considerably less than promised.
They have now received a bailout of €30 billion – from the EFSF (European Financial Stability Facility). Auditors’ estimate of what they needed was twice that.
The eurozone plan is that, later and when the necessary arrangements and agreements have been made – which is now know to be on a fairly long timescale – this debt should transfer from the EFSF to the incoming permanent bailout fund, the ESM – European Stability Measure.
The capability of the ESM is inevitably tied to banking union, a difficult matter which has gone into slomo.
eurozone finance ministers have agreed to extend by a year – to 21014 – the period within which Spain must meet its debt-to-GDP ratio target.
In return the Spanish government yesterday introduced additional austerity measures – including raising VAT to 21% – making it clear to the country that the borrowing rate is must pay – known as bond yield – on new sovereign debt has not eased and remains at around 7%, a level regarded as unsustainable.
This happened against the background of the arrival in Madrid of a long march of miners, protesting against the existing austerity measures which they fear will cost their jobs.
Spain has the highest unemployment rate in Europe, at over 24%. The hike in VAT will hit the poorest hardest and quickest. There is a concern about continuing, perhaps accelerating, civil unrest.
The external perception of the the eurozone’s management of the overall situation remains unconfident of its eventual success.
Update: At 11.00 this morning (12th July 2012( the Bid price for the euro against the USD had fallen again to 1.2175.