Eurozone debt doubts drag euro down

Analysts expect the euro to stay under pressure this year [Reuters]

The euro has sunk to a more than one-year low against the dollar and hit an 11-year low versus the yen amid concerns over Europe’s debt crisis as Italy and Spain came under intense pressure on the markets.

The 17-nation currency fell as low as $1.2775 on Thursday, its weakest level since September 2010.

Spain said it banks would need 50 billion euros, more than first expected, to cover bad loan losses, while Italian Prime Minister Mario Monti rattled nerves with an unannounced visit to Brussels.

Spanish Economy Minister Luis de Guindos’ estimate of the banks’ bad loans was higher than many private forecasts and sat awkwardly with a European Banking Authority finding that Spain’s five biggest banks require 26 billion euros in fresh capital.

Spain’s new right-leaning government meanwhile warned the country’s social security fund’s accounts are worse than had been feared, with a 2011 deficit of 668 million euros ($856 million) instead of a surplus, adding to the problems.

The eurozone debt crisis claimed Greece as its first victim in May 2010, with Ireland and then Portugal also needing massive EU and International Monetary Fund bailouts.

As the crisis drags on, speculation has grown that Italy and Spain could be the next member states to need a costly bailout but it is far from clear whether the resources currently available would be enough.

An EU summit last month came up with yet another series of measures to tame the crisis but implementation takes time, with the markets piling on the pressure and showing no patience as Brussels tries to hold the line.

Standard & Poor’s has threatened to downgrade most of the eurozone if it judges the measures aimed at strengthening fiscal discipline are insufficient to help resolve the debt crisis.

“Depending on how bad things get in Europe, certainly $1.25 is a pretty reachable near-term target,” Omer Esiner, chief market analyst at Commonwealth Foreign Exchange in Washington, said.

“If you start to consider the potential for a mass downgrade in Europe or a worst-case scenario on disorderly defaults of a bank or a sovereign, it could be much lower,” he added.

Against the Japanese currency, the euro fell as low as 98.45 yen, around December 2000 levels, before trading at 98.66.

Bleak prospects

In contrast to Europe, where investors are worried about how banks will repair damaged balance sheets, financial shares helped to lift US stock indexes.

US labour market also improved as US private employers added 325,000 jobs in December, more than double what economists had expected, according to an industry report.

Economists, however, cautioned that the number may have been boosted by seasonal factors.

The pace of growth in the dominant US services sector also picked up slightly in December, according to the report.

The US data only added to the euro’s problems, with the bloc’s economic prospects clouded as governments slash spending and hike taxes in hope of stabilising their strained public finances.

“The idea from the data is that our economy is picking up. So for banks, they’ll start to see some loan growth, which will feed into their profits,” James Dunigan, chief investment officer at PNC Wealth Management in Philadelphia, said.

“That’s different than concerns about capital and stability in Europe, which the region is still dealing with,” said Dunigan, who helps oversee $105bn.

Analysts expect the euro to stay under pressure this year, particularly as banks and governments see hundreds of billions of euros’ worth of bonds maturing in the first quarter.

Already, auctions of French and German debt this week have failed to allay market worries.

Markets have also been bracing for France to lose its top-notch credit rating after agency Standard & Poor’s warned in early December of a mass downgrade of euro zone states due to concerns about the bloc’s two-year old debt crisis.