Spain Bailout Looms; Euro Exchange Rate continues its Fall

May 31, 2012 | By | Reply More

Exchange rate for the Euro currency weakens as Spain bailout looms

By Peter Lavelle at foreign exchange dealer Pure FX

30.05.2012

For the latest exchange rates, click here

Welcome to my latest update of the UK pound to euro currency exchange rate, covering the 23rd to 30th May 2012.

Spanish problems cause the Euro exchange rate to continue to fall

Spanish problems cause the Euro exchange rate to continue to fall

This is intended as a brief guide to what’s affected the currency exchange rate this past week as well as what might happen next, to help you decide if now’s the best time for you to change currencies.

This past week:

1. The euro exchange rate has fallen to a fresh 2-year low against the USD this week, on concerns Spain will need a Eurozone bailout to prevent its banks collapsing. In addition, speculation that Greece might exit the euro following its June 17th general election is also holding the euro exchange rate down.

Why might Spain need a bailout for its banks?

Because its banks have an estimated €260 billion in bad loans left over from a 2008 property crash. This is more than Spain itself can handle, making it all but inevitable it will need aid to keep its banking sector afloat. The alternative is systematic collapse.

When’s it going to happen?

It could be a while, because Spain is a big country and so more equipped to finance itself than other bailout recipients, like Portugal and Ireland. Furthermore there is the issue of pride keeping Spain requesting aid given that, once Madrid puts the EU in charge, it’s likely to lose control of its own budget. That would be a huge humiliation. Nonetheless, in spite of these points, there’s only so long Spain can hold out. We’re talking weeks, rather than months.

And what’s going on with Greece?

The country is due to hold an election in two weeks that’s being viewed as a referendum of its euro membership. If the Greeks vote in a government that favours leaving the euro, that could spell all sorts of unknown consequences for the Eurozone (including a possible breakup!) Hence this euro foreign exchange rate nervousness.

Why does Greece want to leave the euro?

Because it received exactly the kind of bailout Spain is in line for now (in fact, it received two of them.) The problem is that Greece’s Eurozone partners extracted such a high price for this as to make economic recovery impossible. Hence, to restart their economy, Greece is considering a euro exit.

So the euro’s exchange rate is going to remain weak then?

Almost certainly. This crisis makes the continent an extremely unattractive place to put funds. By contrast, the reason the USD is gaining so much is that the US is a vast economy, an ocean away from Europe. If something bad does happen in Europe, that’s the kind of place you want your money.

2. The pound exchange rate has also gained against the euro this week, climbing back above 1.25, in spite of continuing concerns the UK is on the economic slow track. This includes official data revealing that the UK recession is deeper than first thought.

If the UK is in recession, why is the sterling exchange rate gaining against the euro?

For two reasons; firstly, because the UK’s economic woes are mild by comparison to Europe. If retail sales in Spain for instance have declined 22 months on the trot, in the UK they’ve wavered up and down. That makes us better off. Second, because while the future existence of the Eurozone is in doubt, the UK isn’t going anywhere. That makes us a safer bet.

And what can the UK do to get out of recession?

That’s a question for the Chancellor, George Osborne. One thing that looks set NOT to happen though is more quantitative easing from the Bank of England. Speaking recently, members of the central bank said it has already done more than enough to aid the recovery, and that printing more money could be counter-productive (like stoking inflation.) This is a good thing though: if the Bank of England doesn’t want to inject stimulus, it suggests the UK isn’t doing so badly after all. That might aid the pound.

What’s coming up next for exchange rates?

Whether you’re in the UK or deepest darkest Africa, the crises in Spain and Greece are going to dominate. For my money, we could be looking at more euro weakness, as the depths of Spain problems become more apparent, while any hint about the future direction of Greece is likely to sway the foreign exchange market.

Get in Touch

I do hope this post has been useful, and I will of course return with my next update next week.

If you have any questions about currency exchange rates or transferring money abroad in the meantime, don’t hesitate to get in touch at foreign exchange dealer Pure FX. We’d be delighted to provide an in-depth personal answer to your enquiry, free of charge.

For my previous currency exchange rate post, click here

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