Party Time In Europe? Not So Much

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When Spain got an aid package for its ailing banks, currency investors celebrated with a risk rally. This strategist is skeptical.

Let's see: the euro, the Australian dollar, the New Zealand dollar, the Canadian dollar - risk-on currencies got a nice boost after Spain secured aid for its troubled banks. But the rally didn't last long, and Simon Derrick, chief currency strategist at Bank of New York Mellon, isn't surprised.

"Although it is certainly true that the bailout should be a positive for the Spanish banking system, it is difficult to view the events of this weekend in a positive light," he wrote in a note to clients.

"Firstly, Spain will end up owing a lot more money," because the aid is coming through a government fund for bank restructuring, so it will count as sovereign debt.

"Secondly other nations that have already received bailouts may now feel justified in looking to renegotiate terms." (Are you listening, Greece, Ireland, and Portugal?)

Finally, Derrick continues, the timing of the aid suggests that "the northern Europeans were clearly concerned that events could have spun out of control if they had not acted now." That is hardly a vote of confidence in the future of the euro zone.

"Despite today’s relief rally (a familiar feature from each previous bailout), it’s difficult to justify renewed optimism about the outlook for the Euro-area and the EUR from here," Derrick says.



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