Eurozone Uncertainty Increased as Spanish Banks at Risks

By Roger Baettig | May 10 2012 3:04 AM

Concerns over the situation in the Eurozone remained and the focus shifted to the Spanish banking sector. Wall Street slumped in early trading session before rebounding. The DJIA and the S&P 500 indices slipped -0.75% and -0.67% respectively. Crude oil prices fell for the 6th consecutive day but support was found above 95.00 for WTI crude. Gold prices tumbled with the benchmark Comex contract sliding to as low as 1578.5 before ending the day at 1594.2, down -0.64%, amid the euro's decline on worries about Greece's exit from the Eurozone.

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While it's theoretically the Syriza's turn to form a coalition government in Greece, the market has been anticipating a re-election next month as it's expected that no major party would be able to form a government. Concerning the impact of the election last week on the economic outlook of Greece as well as the Eurozone as a whole, the focal point is on the austerity measures imposed by the EU and the IMF on the debt-laden country. Survey showed that while 80% of the voters were against the measures, the same proportion of them prefer to see Greece stay in the Eurozone.

The political situation in Greece has not changed Germany's stance in funding and austerity policies. The biggest economy in the Eurozone and the largest contributor of the bailout funding insisted that Greece has to continue to carry out fiscal consolidation in order to secure financial assistance. Martin Schulz, president of the European Parliament, stated that the agreements must be respected. I don't think we can or should renegotiate. Other German politicians also criticized Francois Hollande, the French president-elect, for his pledge that growth can be substituted for austerity. Peter Altmaier said that the French economy and the country's finances remain in a precarious position and any country that attempts through higher deficits ... to run a supply-driven policy will run foul of the markets very quickly and see its interest rates rise.

Adding to worries over the recent anti-austerity backlash was the banking sector in Spain. Reuters reported that the government would demand that banks set aside another 35B euro against loans in housing sector (on top of the EUR54bn already provisioned). Moreover, other reports showed that Spain will have a fiscal deficit of close to 4% in 2013, higher than the government's forecast of the 3%. Meanwhile, New York University Professor Nouriel Roubini revealed his concerns that Spain would lose market access by the end of the year and the country might be forced to exit the Eurozone.