Sovereign 038 Private

Days after Spain pushed its €65bn austerity package through parliament, the Bank of Spain’s latest growth forecasts remind of the possibility that recession will remain until 2014. The €65bn package includes salary cuts of up to 7% and a three-point rise in VAT to 21%.

It may no longer matter for Spanish aid to bypass state books and onto ailing banks when deepening signs of economic contraction are joined by harsh austerity measures.

The Troika was able to capture the imagination of the market by directing funds to Spanish banks without raising the sovereign debt burden. But as the autonomous regions seek bailouts from Madrid (Valencia request for aid may be followed by at least three other regions) and contracting GDP complicates the meeting of debt/GDP targets, the burden would have to end up hitting the sovereign books.

€100bn has already been committed to the recapitalization of banks, the first €30bn. of which shall be disbursed by month-end. Spain’s autonomous regions are increasingly seeking help from an €18bn emergency-loan fund designed for these regions.

Spain’s Economy Minister Luis de Guindos says his country will “absolutely not” need a full scale bail-out as pivate economists mention amounts as much as €300-400 bn. for a second Spain bailout.

Magnifying the selloff in eurozone equities is the short-selling ban of Italian financial stocks. Dax lost 3% to break below its 100 WMA, facing the next key support at 6230. Yet, the key support level for the German index remains at 5940, which is the 200-WMA, last broken in January. Spain’s IBEX-35 was supported by late short-covering to end down 1.10% at 6,177, after touching a new 9-year low of 5905. Italy’s MIB closes down 2.8% at 12706, narrowly avoiding a fresh three-year low.

Gold’s safe haven allure erodes each day, proving it’s increasingly dependent on the prospects of further central bank stimulus. Gold is trading at 1578, nearing its 100-week moving average (now at 1555). This technical level was last broken in December 2008. Gold has had three failed attempts to break below its 100-WMA this year. 1555 will be the level to watch for gold bugs.