• Bad Loans Abound
• Euro Back Under The Cosh
• Assisted Austericide

Data emanating out of the Bank of Spain today indicates how bad loans associated with the country’s banks rose to 8.95 percent of their outstanding portfolios in May. Savvy forex traders will have spotted that the April/May level – in which loans falling into arrears reached an eye-popping €115.84bn – the highest since way back in April 1994, will know how bad this looks for Spain. Since the decade-long property boom ended four years ago, non-performing loans on the books of Spanish banks have been rising alarmingly.

In another touch of a flamenco twist of Spain’s exploded property bubble, the German Parliament voted today to make up to €100 billion in aid available to the beleaguered Spanish banking system. German Chancellor Merkel, who said today she was not sure whether the European project would survive the current crisis - thus causing the euro to drop against the dollar to a session low on currency charts - said she would caution this “…likely reflects domestic politics where the German public does not want to see a failure of the euro.”

Frau Merkel has been busy clearing the path for the European Stability Mechanism, (ESM) which, if established, will provide financial assistance to members of the euro zone in financial straits. Already backed by the German parliament, the ESM will still be debated by the Constitutional Court which is supposed to announce its decision on 12 September. Tomorrow the German parliament will put the rescue for Spanish banks to vote. Alistair Cotton (pictured), senior analyst at Currencies Direct believes that “chances are slim that the Chancellor will not get her majority” needed for Germany to contribute to the bailout. He points out that otherwise “Spain would be front and centre, liquidity would dry up and the Spanish banks, with no official back stop, would become insolvent almost immediately. The gravity of the situation is main reason why Mrs Merkel will get her way,” he concludes.

Cotton added: “It is likely that Angela Merkel will get the majority vote she needs to commit to Germany’s share of the Spanish banking bailout. However, the markets remain cautious after the German constitutional court delayed a vote by up to eight weeks on whether Germany can legally participate in the ESM.”

Adding his view about the pain in Spain, Neal Kimberley, FX Analyst with Thomson Reuters, points out that German Fin Min Schaeuble is adamant that the liability for Spain’s up to 100 billion euro financial sector bail out lies with the country’s central government itself.

“The Spanish press is pointing out that the regions,” says Kimberley, “namely Andalucía,  the Canary Islands and Catalonia are all pushing back against further austerity or “austericide” as it was termed by one Spanish trade union leader.”

Meanwhile, Kimberley flags up how Italian Prime Minister Mario Monti wants the Sicilian Governor Raffaele Lombardo to step down as the autonomous region over grave concerns that Sicily might default on its debt. As Kimberley says: “It ain’t a pretty picture, even if the market is currently not necessarily captivated by the kind of details I mention above. Sorry, but I would not touch the single currency with a barge pole in this environment!”

Drew Hillier. Editor, ForexSpace.com