Euro Up but Spain Under Pressure

For the fifth day, the euro is recording higher highs and higher lows. It has advanced by roughly 3.25% since last Monday's lows. While we recognize an improved news stream, the main circumstances of the European debt crisis have not gone away. Spain's challenges are overshadowing Portugal and Greece.

Last week Spain offered bonds for the first time since the Fitch downgrade. The bonds were well received, but at the price of a roughly 50% increase in yields. Spain will be issuing 10- and 20-year bonds on Thursday.

The timing could be problematic given two developments today. First, the chairman of BBVA said in a speech today that most Spanish companies and banks have been closed out of the international credit markets. Second, the ECB reported today that Spanish banks borrowed a record 85.6 bln euros from it in May. The second point would lend even more credence to the first point.

Spanish 10-year bond yields have risen 21 bp today, while bunds are up 6 bp in yield and Portugal and Greece 10-year yields are 12-14 bp higher.

Note that the German paper FAZ reports that the ECB Trichet and EC's Barroso want to extend aid to Spain. This, however, like last week's piece in Germany's FT, have been denied. On one hand preemptive action might escalate anxiety among investors. On the other hand, some observers suspect that preemptive action may say money in the long run.