Spain: Beggars CAN Be Choosers

Think people in relationships are demanding? Try negotiating with indebted countries in the euro zone!

In a recent twist in the euro zone debt saga, Spain’s Finance Minister Luis de Guindos said in an interview with Spain’s state-owned news agency EFE that the ECB should not limit how much or for how long it’s going to intervene in the secondary markets if it wants to see Spain officially ask for a full bailout. He believes that Spain’s budget adjustment program and structural reforms presented earlier should be enough to gain support from the ECB.

If you remember, ECB President Mario Draghi recently boosted investor optimism when he hinted that the central bank would intervene in the markets once indebted euro zone economies officially ask for bailout packages.

But Spain isn’t planning on any official requests! At least not until the ECB first commits unlimited support for the region. Who said beggars can’t be choosers?

Considering that the Spanish economy contributes to the euro zone a lot more than Greece does, it’s no surprise that Spain wants to call the shots on this one. After all, being the fourth largest economy is one heck of a bargaining chip!

Now let’s get to the juicy part. What does this mean for the euro?

Looking at the daily chart of EUR/USD, we see that the pair has been in consolidation for a few days now. The world’s most traded currency pair has been stuck in 150-pip range since August 9. But don’t fret! I think we’d see more action on the pair as the Spanish bailout drama unfolds!

EUR/USD Daily Chart

There are three scenarios that I can imagine for EUR/USD:

  • If the ECB agrees to Spain’s request, EUR/USD could break out to the upside. It could rally to its former highs around 1.2600-1.2700 as investors wouldn’t worry so much about Spain defaulting anymore.
  • If the ECB ignores Spain’s request, we could see a breakdown below 1.2250. It’s not hard to imagine investors panicking over the possibility of a Spanish default. And so, EUR/USD could tumble all the way down to 1.2000-1.2100.
  • If the ECB agrees to Spain’s request, we could see risk appetite get stronger.

Of course, these scenarios are only this not-so-old man’s humble opinion. What are your thoughts?

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