As expected, after hitting a simply ridiculous level of over 1.40, the EURUSD has started to materially roll over, and is now down to 1.383, with a first interim target in the mid 1.20s. The reason, in addition the billions in debt rollover this month (see Portugal's very weak auction yesterday), is the realization that the banking system in a Europe which is allegedly poised on the edge of tightening, is as weak as ever, and will have to take another dose of stress test placebos which will do nothing to assuage skepticism as spreads hit another day of record levels. Today, Moody's added insult to injury after downgrading Spain for the second time in 3 months, from Aa1 to Aa2, with a second level of insult arising from Moody's assessment that Spain may also suffer due to the recent surge in oil and see further downgrades as the oil rise would have Spain credit implications, adding that Spanish government has little control over region's spending.
Spain’s rating was downgraded to Aa2 by Moody’s Investors Service, which said the cost of shoring up the banking industry would be more than the government expects.
The “eventual cost of bank restructuring will exceed the government’s current assumptions” of 20 billion euros ($28 billion), the company said, costing 40 to 50 billion euros, while the risks to government finances remain “skewed to the downside,” the company said in a statement today. The outlook is “negative.”
The Bank of Spain is due to announce later today the capital shortfalls of lenders under new banking rules, after saying the total capital hole won’t exceed 20 billion euros. As Spain tries to convince investors that struggling savings bank won’t overburden its public finances, European leaders have set a March 25 deadline to approve a “comprehensive” package of measures to end the sovereign debt crisis.
Moody’s put the rating on review on Dec. 15, after lowering its credit grade to Aa1 from Aaa in September. Fitch Ratings, which rates Spain AA+, changed the outlook to “negative” on March 4, while Standard & Poor’s rates the nation AA, after stripping it of its top AAA grade in January 2009.
And while nobody cares what Moody's or S&P has to say any more, this downgrade, together with that of Greece yesterday reaffirms that the world is, albeit with a 2 month delay, gradually waking up to the European "bull in the room" problem, which suddenly everyone realizes has yet to be addressed.