ECB Rejects Spanish Bailout Plan

(EU) ECB rejects Spanish Bailout plan to indirectly tap into its cash in order to recapitalize Bankia; Told govt officials that a proper capital injection is needed. Spain plan said to be potentially in breach of EU rules. Govt officials said to have argued that Spain has implemented reforms requested by Brussels and wants to avoid bailouts similar to those of Portugal, Greece and Ireland. In turn, Brussels is said to have been frustrated by PM Rajoy’s handling of the crisis ever since he attempted to unilaterally revise deficit targets last month.

(EU) Separate US financial press report indicating Spain’s own bailout fund has only about €9B remaining. While it can be replenished through debt issuance, recent auctions have seen weak demand and sharply higher borrowing costs.

(EU) Follow Up 5:30 ET ECB: Have not been consulted on Spain recapitalization plans but is prepared to give advice on the development of such plans – Statement

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(EU) European Commission may request that EU Fin Ministers allow Spain an extra year to achieve 3% deficit to GDP target, moving deadline from 2013 to 2014.

How to interpret this?

We saw sharp sell-offs of EURUSD immediately following ECB’s rejection, it seems that the market rather take a Spanish Bailout as a positive signal than a rejection of a Spanish Bailout Plan… Which once again brings us back to the basis of market analysis, that uncertainty is always worse than news, no matter how bad the news is.

I would expect to see EURUSD retest the 2011 lows of around the 1.2000 level, giving the fact that Greek election is coming up in a couple of weeks and Spain is under tremendous scrutiny, not mentioning the implication of requesting extention to the Deficit to GDP target… The key is to keep selling EUR whenever it makes significant recoveries.

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