Spain is seeing huge amount of withdrawal from its banking system. It will need to recapitalize its banks if the withdrawal persists. Spain has not much money and will need to borrow from the financial market. But its cost is now at close to 7%. This was the rate that push Greece into a international bailout. Spain is being push towards international bailout.
The euro fell to as low as $1.2324 on trading platform EBS at one point, its weakest since July 2010. It last fetched $1.2345, down 0.1 percent on the day, with a drop towards $1.20 likely as bears remain firmly in control.The drop in the common currency came as Spaniards sent money abroad in droves, worried about the health of the banking system.
Bank of Spain data showed a net 66.2 billion euros ($82.0 billion) was sent abroad in March, the most since records began in 1990.”It is looking very bearish for the euro with the latest capital flows data showing a significant amount leaving Spanish banks, all of which indicate they will probably need official help,” said Peter Kinsella, currency strategist at Commerzbank.Any help from the European rescue fund for Spain would mean an additional tax burden on Germany, Europe’s paymaster, and could hurt the safe-haven status of German bunds, he added.”It is not a situation where there is much help for the euro and chances are it is headed towards $1.20.”With German two-year yields near zero, traders said a lot of safe-haven flows have, so far, stayed within the single currency area.
But if that were to change, the euro’s decline against the dollar and the yen could accelerate considerably.The euro’s selloff has gained steam this week as Spain’s borrowing costs surged on worries it may need to issue more debt to recapitalise its banks, adding stress to markets already frayed by anxiety that Greece may exit the euro zone.The rising borrowing costs risk pushing Spain towards an international bailout.
The yield spread between Spanish 10-year government bonds and German Bunds have risen to euro-era highs this week, and the euro has fallen almost in lock step with that move.”We’re looking for $1.18 by the end of Q3, and at this rate, it could happen before that,” said Callum Henderson, global head of FX research for Standard Chartered Bank in Singapore.”During this risk-off environment, the U.S. dollar is the only place to be,” he added.