GO
Loading...

Busch: What Spain's Rajoy Is Really Telling the Market

Wednesday, 26 Sep 2012 | 11:11 AM ET
A man with a head wound tries to calm the crowd of protestors during a demonstration surrounding the Spanish parliament to protest against spending cuts and the government of Mariano Rajoy on September 25, 2012 in Madrid, Spain.
Denis Doyle | Getty Images News | Getty Images
A man with a head wound tries to calm the crowd of protestors during a demonstration surrounding the Spanish parliament to protest against spending cuts and the government of Mariano Rajoy on September 25, 2012 in Madrid, Spain.

Today, Spain is at the forefront in the headlinesand media with ugly protests in Madrid ahead of Thursday’s budget announcement.

With an unemployment rate over 25%, one can understand how the population is distraught over additional budget cuts that will be proposed this week. Suffice it to say, the optics are nasty and more protests are expected later today.

Also, we have the news yesterday that Catalan President Artur Mas called for early elections to be held November 25th and to push for “self-determination.” (See more below)

We also have Spain announcing today that their budget deficit for from January to August has swollen from 3.81% last year to currently 4.77% of GDP with spending up 8.9% and tax receipts down 4.6%. (They better be careful or soon their going to resemble the US!)

Spain Austerity Protesters Clash with Police
CNBC's Michelle Caruso-Cabrera reports the anti-austerity protests in Spain were planned, and has turned out to be more violent than expected. CNBC's Rick Santelli weighs in.

Next, the Bank of Spain warned that Q3 GDP fell at a significant rate. Finally, we have three European finance ministers from Finland, Netherlands and Germany state that troubled banks (read Spain here) need to follow capital raises in this progression: private, then sovereign, then ESM. This translates into additional pressure on sovereigns as they have to put the new capital injections on their books and increase their debt.

With this backdrop, Spain’s current PM Rajoy stated in the WSJ that Spain will likely ask for a bailout if their funding costs remain high.

Here’s the key section:

Asked whether his government would apply for a bailout, Mr. Rajoy said, "At the moment, I cannot tell you." He said the government would need to determine whether conditions attached to the bailout are "reasonable."

He added, however, that if interest rates on Spain's debt were "too high for too long," thus harming the economy and raising the government's debt burden, "I can assure you 100% that I would ask for this bailout." ( Read More: Spain Bailout Would Boost Euro, but Not for Long: Pros)

Unwittingly, Mr. Rajoy is telling the markets to drive the value of his bonds down as far as they can because he will not ask for a bailout until that happens. Unsurprisingly, Spain’s borrowing costs have risen sharply due to the dawdling of the Spanish government of this critical issue. The Spanish 2yr bond yield has risen from a low of 2.60% on September 7th to a high today of 3.25% and the 10yr yield rose from 5.55% to 5.92%.

Spain Protesters Turn Violent
CNBC's Michelle Caruso-Cabrera reports the anti-austerity protests in Spain have turned violent, and that protesters' permit to protest at the parliament is almost expired.

Overall, no one said that Europe would be resolving their issues on a straight-line basis or even a timely basis. Since July, the biggest change has been the elimination of the 2-3 standard deviation risk of a break-up in the currency union. The work to create a banking union also reduces this tail risk….assuming they keep working on it. This week is a reminder that the process is sporadic, halting and sometimes violent. (Read More: Prepare for New ‘Currency Wars’ After QE3: Analyst)On CNBC's "Money in Motion" Friday, I recommended waiting to buy the EUR until we had a pullback to 1.2850. (I wish I had said to sell it first and then buy it at this level, but ….)

Here was the structure for a medium term, long EUR trade :

  • Entry 1.2850
  • S/L 1.2650
  • T/P 1.3150

The risk is that the new range for the EUR is 1.25-1.30 and that the rally to 1.3150 was an aberration.

Andrew B. BuschDirector, Global Currency and Public Policy Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a contributor to CNBC's Money in Motion Currency Trading.You can comment on his piece and reach him hereand you can follow him on Twitter at http://twitter.com/abusch .

Tune In: CNBC's "Money in Motion Currency Trading" airs on Fridays at 5:30pm and repeats on Saturdays at 7pm.

Learn more: The essential vocabulary for currency trading is on Key Currency Terms. Top strategies are broken down for you in Currency Class.

Talk back: Tell us what you want to hear about at moneyinmotion@cnbc.com.

Featured