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Pound gains as Spain teeters on the brink

Could Spain need an EU bailout? Speculation regarding this possibility has intensified this past fortnight, sending the pound to 1.21 against the weakened euro.


This is my latest update of the British pound to euro exchange rate, covering the 6th to 13th April 2012 period. This is intended as a brief guide to what’s affected the exchange rate in the last week, to help you decide if now is the best time for you to change currencies.

I wouldn’t blame Spanish Prime Minister Mariano Rajoy for feeling a little disgruntled right now. Like a good student, he has listened to the teachings of his EU professors and announced spending cuts of some €28 billion, not to mention €10 billion more in so-called efficiency savings in health and education.

Has this restored market confidence in Spain? Not an inch. In fact, since announcing these measures, banded as necessary to secure Spain’s future, Spanish government bonds have gone in the wrong direction, climbing just one percentage point short of the 7.00% at which Portugal and Ireland threw in the towel. So, having done what the EU and the markets asked and been punished for it, what’s the man to do?

Euro falls

The other side of all this of course is the euro. Since the markets decided to start slapping Spain about (apparently for no more convincing reason that that Spain is vulnerable, and they can) the pound has climbed to its highest point against the euro since August 2010, at 1.2135.

There is (quite obviously then) a good opportunity to change currencies here, or perhaps lock in the exchange rate if you have a transaction in mind for the future. If you have any questions about this, don’t hesitate to leave a reply below.

What next?

The next question then is: what happens to Spain and the euro in the immediate future? Spain I think has two choices: it can either do something unexpected to dig itself out of this mess, or it can hope someone else does the digging for it.

For the first option, there is an interesting piece in The Economist this week, in which the blogger speculates that, if Spain ends up being punished for doing what the EU and markets expect, why not rebel? Spanish public debt after all is relatively low compared to its European Union partners. Why not do something out of left-field, and introduce stimulus spending to reduce unemployment? It would be hard after all for things to get worse than they already are.

Alas, in comments to the Spanish Senate this week, Mr. Rajoy signalled that he intends to remain suppliant to the EU. Although confessing that his recent measures are not going to help the economy in the short term, he argued that Spain has no choice, and that what’s good for the eurozone is good for Spain. He sounded defeated, in short (encouraging in a leader that has been in power just four months!)

If Spain is to avoid a bailout in other words, it will not be because of steps undertaken by the Spanish government. Goods news then, that this week Benoit Coeure of the European Central Bank said the bank might re-activate its cheap loan program to keep Spain falling over the edge. Indeed, Mr. Coeure can be described as the sole saviour of Spain this week, and the reason Spanish bonds have not yet breached 6.00%.

If the ECB does act, that will give Spain some breathing space, as well as protecting the euro from further losses.

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Peter Lavelle is an economist at foreign exchange broker Pure FX. For a free no-obligation quote regarding changing currencies, get in touch at foreign exchange specialist Pure FX.

Copyright: Peter Lavelle, Pure FX
Category: Expats
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