The future of the European Union will be played out in the next few days

In what seems like a never ending trip down disaster/crisis road, today saw records being broken by the Spanish, And not the good Guinness book of world record type of record.

Spain’s cost of borrowing has surged to the alarming level of 7% making it the highest rate of interest on debt seen since the formation of the Eurozone. It was at a similar level that Greece, Portugal and Ireland were forced to beg for a sovereign bailout, if Spain has to then the harm its neighbors could prove irrevocable. The already promised 100billion bailout of Spain’s banks did nothing to ease investor fears proving that the EU is fast running out of ideas in how to save the struggling currency from disaster.

After a crisis meeting was held in Madrid Spain’s foreign minister José Manuel García Margallo came out with one of the most dramatic statements on the situation so far;

“The future of the European Union will be played out in the next few days, perhaps in the coming hours,” he said today, according to El Pais .”The three months that (IMF boss) Lagarde gave is possibly too long.”

The Europa Press agency gives a slightly different version, but the message is the same. “The future of the Eureopan Union will probably be played out in the coming hours,” it reports him as saying.

Margallo called on the ECB to buy Spanish bonds. The fact that yields on the benchmark ten year bond have edged back after breaking through the 7% mark may mean that it is already doing just that.

Worryingly Italy’s costs rose in response, its interest rate rising to 6.2%.

Nicholas Spiro, managing director at Spiro Sovereign Strategy said: “Italian auctions are now as nerve-wracking as Spanish ones. While the Treasury tried to mitigate the dramatic deterioration in sentiment by limiting supply at today’s sale, the scale of the concessions show how vulnerable Italy’s debt market has become. Demand is holding up, just about, but only because of unprecedented domestic financial repression. Unless the ECB steps in very soon to restore confidence, Italy and Spain will no longer have market access.”

Its looking more and more likely that the Euro is in need of a miracle to stop the rot and prevent contagion, who will provide one? Not Angela Merkel that’s for sure. The German Chancellor told the Berlin Parliament she would tolerate “miracle solutions” and once more flatly refused to consider the issuing of euro bonds or deposit guarantee schemes with the EZ weaker members. Instead she called for further political integration amongst the EU’s members.

Across the pond in the good old US of A the dollar weakened against 13 of its 16 major peers after reports showed that U.S inflation suffered its heaviest decline in three years, raising fears that the Federal Reserve will implement more steps to boost the flagging recovery.

“There’s nothing about the U.S. data that makes you want to own the dollar,” said Kit Juckes, head of foreign-exchange research at Societe Generale SA in London. “You’ve got an economy that’s growing slowly, an inflation rate that’s going to come lower, and a central bank with an itchy trigger finger to give us more quantitative easing.” The dollar fell 0.3% to 79.22yen and 0.1% against the Euro to $1.256.

This morning’s report also showed that the US economy’s recovery may be stalling at a faster rate than observers initially feared. Claims for jobless benefits jumped by 6,000 more than predicted to 386,000 in the week ending June 9th. Economists had predicted that the figure would fall to 375,000.

Chris Williamson, chief economist at data firm Markit, said the disappointing US data makes the case for more economic stimulus more compelling.

“A sharp fall in inflation and new signs of a weakening job market has opened the door further for the Fed to stimulate the tired-looking US recovery with another dose of stimulus next week.
With the unemployment rate running at 8.2% in May, non-farm payrolls showing the weakest rise for a year and today’s jobless claims data suggesting the jobless rate could well rise again in June, pressure is mounting on the Fed to give the economy a shot in the arm of additional stimulus when the FOMC meets next week.

Combine these weak labour market data with the recent back-to-back monthly falls in retail sales and disappointing business survey data, which showed exports stagnating in recent months due to the adverse international economic environment, the case for QE3 starts to look quite compelling.”

The Pound to Euro exchange rate is currently trading at 1.233

The Pound to US Dollar exchange rate is currently trading at 1.553

The Euro to Australian Dollar exchange rate is currently trading at 1.261

The Euro to US Dollar exchange rate is currently trading at 1.259

The Euro to Pound exchange rate is currently trading at 0.810