PARIS: The euro slumped to a 16-month low against the dollar Thursday after Spain rekindled concern about the magnitude of its banking sector problems and a French bond auction failed to reassure markets.
The euro slumped to $1.2831 shortly after the bond auction in France sold its planned amount of long-term debt at modest increases in yields but with demand down considerably despite banks being flush with cheap money from the European Central Bank.
The shared European currency also dived to an 11-year low against the safe-haven Japanese currency to strike 98.58 yen, while European stocks mostly slid.
Spain’s new economy minister said Thursday that banks may face up to €50 billion ($65 billion) in bad loan provisions and he vowed to crack down on regional deficits in a new austerity drive.
Economy Minister Luis de Guindos’ estimate of the banks’ bad loans, provided in an interview with the Financial Times, was higher than many private forecasts.
"If you take international valuations as in the case of Ireland, at the most you are talking about the need for €50 billion of extra provisions (for Spanish banks)," De Guindos said.
"In the great majority of cases, they can provide it themselves from their profits, and it could be done not in one year but over several years."
The European Banking Authority said in December that Spain’s five biggest banks required an extra €26 billion in capitalization.
"Investors are increasingly jittery that the fragile banking sector in Spain could prompt the need for external support," said analyst Nick Stamenkovic at RIA Capital Markets, adding that the euro "looks set to test $1.25 soon".
Financial markets were also underwhelmed by the outcome of a French bond auction, held under the shadow of France possibly losing its top triple-A rating.
The French treasury agency announced Thursday it had raised, as expected, €7.963 billion in bonds maturing in 2021, 2023, 2035 and 2041.
The yield on 10-year bonds rose slightly in France’s first offer of long-term debt this year, to 3.29 percent against a rate of 3.18 percent during the last similar operation on Dec. 1.
However demand was lower, with a bid to cover ratio of 1.64, almost half of the 3.05 it was in the December auction.
"The uncertainty over the sovereign debt situation remains, alongside fears that key nations such as France could soon lose their triple-A credit rating is a constant drag on the euro’s prospects," said City Index analyst Joshua Raymond.
Investor concern spread into the secondary bond market with Italian yields once again moving above the key seven percent mark, a borrowing rate economists believe is unsustainable.
Spanish yields jumped to 5.530 percent from 5.395 percent on Wednesday.
"There are serious doubts on the health of the banking sector notably in Spain and Italy and the ECB has really slowed its sovereign debt purchases from countries in difficulty," fixed income broker at Natixis Cyril Regnat said.
Standard & Poor’s has threatened to downgrade most of the eurozone if it judges the measures European leaders decided upon to strengthen fiscal discipline are insufficient to help resolve the debt crisis.
The French auction, following a German 10-year bond auction on Wednesday that saw barely sufficient demand, dispelled any hopes that the half a trillion euros the European Central Bank pumped into banks last month would bring easy relief to the sovereign bond markets.
The ECB last month provided eurozone banks €489.2 billion in three-year loans at 1.0 percent interest in a bid to avert a possible credit crunch.
Following the last similar operation during the global financial crisis, banks used a considerable portion of the money to buy sovereign bonds, helping keep government borrowing rates low.
The eurozone bailout fund, the European Financial Stability Facility, meanwhile easily raised €3 billion in three-year debt intended for Portugal and Ireland, the only eurozone countries along with Greece to have received EU rescue packages during the crisis so far.
In afternoon trade, some European stock markets took a beating, with Madrid’s IBEX 35 index losing 1.63 percent to 8,441.90 points and Milan’s FTSE-Mib diving 3.20 percent to 14,835.95 points.
Paris’ CAC 40 in Paris shed 0.67 percent to 3,172.27 points, London’s FTSE 100 slipped 0.09 percent to 5,663.55 points, but Frankfurt’s DAX 30 rose 0.12 percent to 6,118.94 points.