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So it’s now all about Spain! It still defeats me that a country getting its house in (some kind of) order prior to asking for a bailout is positive for either risk appetite or the currency. As relief rallies go yesterdays was pretty impressive but does that really now mean that the market has gone away from the technically significant 1.2930 level? It seems there is always another potential banana skin on the horizon and already today we have seen dismal growth data from France. The French economy was flat in Q2 and grew at 0.3%YoY. German retails sales for August were also worse than expected. Back to Spain though and later today we see the results of the stress tests that have been performed on their banks. Additional capital requirements of over Eur 100 bio. are already in the market but this will lead Spain closer to a bailout request. It is ironic that yesterday’s 5th austerity package drew appreciation from the market which saw Spanish bond yields drop. Prime Minister Rajoy has said that he won’t ask for a bailout unless bond yields “remained too high”. The Spanish Government will raid for the first time a decade-old pension reserve fund that invests in government debt to pay for an increase in retirement payments. The Cabinet agreed to use 3 billion euros ($3.9 billion) from the 67 billion-euro reserve fund, Deputy Prime Minister Soraya Saenz de Santamaria told reporters yesterday in Madrid. It raised pensions 1% in the 2013 budget and indicated it would compensate retirees for above-forecast inflation. “The reserve fund is there to be used,” Budget Minister Cristobal Montoro said. “Politically, it’s very important” to maintain pensioners’ purchasing power. The pension reserve invests mostly in Spanish government bonds, and accounts for about 10% of the central government’s outstanding debt. The cache that has been built up since 2000 to safeguard pensions from the aging population is being raided as the 25% jobless rate undermines the welfare system’s revenue. This adds to pressure for Spain to ask for the bailout since it means less support for Spanish debt. It is clear that if the fund is being drawn upon it won’t then be able to invest in future bond issues. What conclusions can be drawn from Spain’s 5th austerity package? Read my views here