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Jul 24, 2012, 08.40 AM IST | Source: CNBC-TV18

Crisis surges in PIGS as EU watches, Yen hardens: Rabobank

Lyn Graham-Taylor, fixed income strategist, Rabobank explains to CNBC-TV18 that Spain’s demand for an additional bailout package was expected as it became clear that the Spanish bank bailout funds would stay on the sovereign balance-sheet for the foreseeable future.

Lyn Graham-Taylor, fixed income strategist, Rabobank explains, in his analysis on CNBC-TV18, that Spain's demand for an additional bailout package was expected as it became clear that the Spanish bank bailout funds would stay on the sovereign balance-sheet for the foreseeable future. Taylor adds that the fall of the Euro against the Yen is a sign of investors seeking havens of certainty as the crisis in the euro-zone worsens.

Below is an edited transcript of the analysis on CNBC-TV18.

Q: Was Spain's plea for an additional bailout expected?

A: In the background of the continued crisis in Europe, the problems in Spain are worse than anticipated and unknown in their size. Towards the end of the last week, it became likely that the Spanish bank bailout funds will stay on the sovereign balance-sheet for the foreseeable future.

I think a combination of factors have led to this large sell-off along with the news on Greece where there were reports that the IMF may not issue any further bailout funds due to the poor performance of the reforms programme.

Q: What about yields? Investors don't seem to be particularly impressed by the Spanish government’s implementation of measures? Where do you see yields headed? Are they touching 7.5%?

A: With regards to what the Spanish government can do, it's largely out of their hands now. It's a systemic and fundamental problem. Unless there is some form of debt pooling or perhaps large scale approach to the sovereign debt by the ECB, there is nothing that Spain itself can do to force this rise in yields.

Q: What are you now anticipating by the way of action from either the ECB or the IMF? The concerns regarding Greece have resurfaced on whether it will continue to be a part of the euro zone. With Valencia and Murcia in trouble, is there a possibility of the crisis spreading?

A: Yes, I think the most likely scenario currently envisaged is that Spain will seek some form of sovereign-bailout package. However, there won’t be the risk of mutualisation of debt that is ultimately required to take place at this stage. Once the bailout is agreed, the focus will simply shift to Italy. Italy’s debt market is far too big to bail and that’s where ultimately the unity of the EU will lie.

At the moment, the EU favours a move to keep Europe united and the rescue will take the form of large-scale ECB debt purchases and in long-term, the mutualization of debt in the form of euro bonds.

Q: Do you expect the global equity markets to continue its free-fall and also a quick word on the Euro which has slid to an 11-year low against the Yen today?

A: It makes sense that investors want to move given the uncertainty surrounding the Euro. Investors will flock to safe-havens such as the Yen and in terms of equity markets we know that global economic growth has been affected by the euro zone debt crisis. So, it is not surprising that the equity markets are also suffering.

READ MORE ON  Rabobank, Yen, Spain, bailout, Euro,

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