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EURUSD Rallies After Spain Approves 2013 Budget and Reform Package

By Tzu-Wen Chen
27 September 2012 17:21 GMT

THE TAKEAWAY: Spain approves 2013 budget and reform package > Budget to tap pension reserve fund to help banking sector debt; suggests Spain to tackle debt crisis internally > EURUSD bullish

The Spanish Cabinet approved the nation’s 2013 budget and economic reform package today, which will see the government passing 43 new laws to reform the economy over the next six months. In a news conference following the cabinet meeting, Deputy Prime Minister Soraya Saenz de Santamaria and Finance Minister Cristobal Montoro said that the budget is designed to end Spain’s debt crisis, asserting their confidence that Spain will meet its 2012 deficit target and optimism that 2013 will mark the end of recession in Spain

The budget will focus on current spending rather than revenues, with around 64 percent of the budget continuing to go towards “social spending” such as pensions and benefits despite the proposed spending cuts.

Amid the positive rhetoric from the Spanish ministers, there is only one key change to the budget that is worth noting, which is that the Spanish government will tap into the nation’s pension reserve fund to help its financial sector. In short, this change suggests that the Spanish government is aiming to tackle its banking debt crisis internally, rather than looking for external aid in the form of an international bailout package. However, with Spain continuing to face a deteriorating economy and a 25 percent unemployment rate, and Spanish bond yields at elevated rates, concerns remain that the government itself may still need rescuing in coming months.

EURUSD 5-minute Chart: September 27, 2012

EURUSD_Rallies_After_Spain_Approves_2013_Budget_and_Reform_Package_body_Picture_1.png, EURUSD Rallies After Spain Approves 2013 Budget and Reform Package

Chart created using Market Scope – Prepared by Tzu-Wen Chen

The euro rallied against the US dollar, with the positive news from the Spanish government boosting risk appetite. At the time this report was written, the EURUSD pair had risen to $1.2893.

Key comments from the Spanish ministers are summarized as follows:

  • Budget aims to make 2013 last year of recession
  • Spain confident to meet deficit target in 2012
  • Revenue target for 2012 to be exceeded
  • Tax revenue for 2013 to rise 3.8% vs. 2012 budget
  • Reform plan goes beyond EU recommendations
  • Spain to make more efforts on cuts than tax hikes
  • Spain approves agreement on using pension reserve fund
  • Spain to tap pension reserve fund for EU3 bln for liabilities
  • Budget adjustment is about EU13 billion
  • Spain to create independent fiscal body
  • Spain to ‘develop’ labor reform
  • Spain to strengthen ‘single market’ and simplify regulation for single market

--- Written by Tzu-Wen Chen, DailyFX Research

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27 September 2012 17:21 GMT