ForexSpace.com - Here we go again. Forex news barely had time to digest this morning’s warning from Fitch that The Netherlands’ triple A rating is under scrutiny, when into the ring heave Moody’s – one of the other ’big three’ tyrants of the markets – laying into an already punched out Spain and Italy that their current soaring costs of borrowing place the retrospective sovereigns at "high risk” of default.

Economists at Moody's Analytics proclaim how up till now, 7 percent has generally been considered the point at which government borrowing becomes unsustainable. Certainly, it’s the benchmark where Portugal, Greece and Ireland were forced into bailout territory.

Enam Ahmed, senior European economist at Moody's Analytics, said how using current economic and demographic projections, and considering the government's behaviour regarding debt problems, “we estimate that Spain can add to its public debt by the equivalent 97 percentage points of GDP before it becomes unmanageable, but borrowing costs above 5.7pc will significantly raise the chance of default."

Moody’s’ monthly "fiscal space" analysis also showed Italy needs to reduce its long-term borrowing costs to 4.2 percent in order to return to a sustainable path. Italy, which has a €1.9 trillion debt mountain, is particularly vulnerable to shocks in the sovereign bond market. Nonetheless, Mr Ahmed added that he did not foresee either Spain or Italy needing a bailout from the EU and IMF.

"An official rescue of Spain or Italy this year would plunge the euro zone into a deeper recession,” said Ahmed, “and the risk of a euro zone breakup would become real. But the gradual approach means it will not be until 2014 that the single currency recovers all its lost output from the 2008-09 recession.”

Of course, Spain does remain the primary forex news focus for traders and top forex brokers alike, with this morning’s bond auction closely watched by investors. Broadly speaking, it turned out a success this morning, raising a little over the €2.5bln they were targeting. The auctions were also well subscribed with the 2 year bonds covered 3.3 times compared to 2.0 in October, and 10 year bonds being covered 2.4 times compared to 2.2 in January, however this was expected as it is believed Spanish banks still had 30 percent of the LTRO’s to invest in the auction.

As Alpai UK market analyst Craig Erlam says: “The yields on the bonds came in high, as expected, with 2 year bonds yielding 3.463 percent and 10 year bonds giving an average yield of 5.743 percent compared to 5.4 percent in January, but still lower than the yields in the secondary market. The news appears to have brought some calm in the equity markets, especially in Spain where the IBEX, which fell 3.75 percent yesterday, is trading around flat for the day. The FTSE, CAC and DAX however are all up in early trading, posting gains of 0.4 percent, 0.43 percent and 0.39 percent respectively. 

Drew Hillier. Editor