FOREX-Euro falls on debt worries over Spain's bank rescue
* Spanish, Italian bond yields rise * EU, German officials say Spain faces supervision * Greek elections loom, could weigh on euro By Gertrude Chavez-Dreyfuss NEW YORK, June 11 (Reuters) - The euro sank against the dollar and yen on Monday as a brief spate of euphoria over Spain's bank bailout deal gave way to worry that the country is being saddled with even more debt, heightened by a wary mood days ahead of Greek elections. The euro zone agreement reached over the weekend to lend Spain, the region's fourth-largest economy, up to 100 billion euros to help prevent a run on its banks had initially spurred optimism. The euro had jumped more than 1 percent against the dollar to hit its highest level since May 23. But gains were erased during the New York session as the deal's obligations came under the microscope. With the loans potentially lifting Spain's debt by as much as 100 billion euros and possibly ranking ahead of regular government debt in the queue for repayment, Spain's already high borrowing costs could rise further. "What the bailout deal has done is burden Spain's government with additional debt which the country is not in a position to handle," said David Pierce, director for business development at GPS Capital Markets in Salt Lake City, Utah. The firm advises corporate clients on managing currency exposure. "I think Spain may have to increase the amount that it has to pay on its bonds," he said. EU and German officials said Spain faces supervision by international lenders, contradicting Spain's prime minister, Mariano Rajoy, who insisted the cash came without such strings. Spanish and Italian bond yields rose sharply as the market relief gave way to doubts. Investors fear that if the euro zone's future permanent bailout fund, the European Stability Mechanism, is used for the rescue, they will be subordinate to official creditors and face losses in any debt restructuring. The euro fell to a session low of $1.2481 and was last down 0.3 percent at $1.2486, although it remained well above an almost two-year low of $1.2286 hit earlier this month. Analysts also said the bailout agreement only addresses the banking sector's funding needs, and not Spain itself. As such, "the Spanish government will need to maintain the confidence of debt markets beyond the current episode as it will be refinancing its debt and funding its deficit," said Emanuella Enenajor, economist at CIBC World Markets in Toronto. Against the yen, the single currency, which hit its highest level in three weeks in the overnight session, last traded down 0.4 percent at 99.13. GREEK ELECTIONS Traders said any euro bounce should give way to profit-taking before the June 17 Greek elections. A win for parties opposing the austerity terms of the country's international bailout could lead to Greece leaving the euro. Hedge fund manager Stephen Jen, at SLJ Macro Partners in London, said Greek polls, which suggested a slight lead by the pro-bailout part, have little credibility. He cited polls in his home country, Taiwan, where the competing parties routinely distort the polls to help their causes, as a key part of the campaign tactics. "I'd be surprised if these polls in Greece have the same veracity as the Gallup polls," Jen said. Unease about the euro was evident in the options market, with one-month euro/dollar risk reversals biased toward euro puts trading at 1.9 percent, versus 1.8 percent on Friday. Sentiment, however, has improved since the start of the month when it traded at 2.2 percent. One-month implied volatility on euro/dollar likewise increased to more than 13 percent on Monday and was last at 12.60 percent. Bets against the euro surged to a record high in the week to June 5, while net long dollar positions extended gains, according to the Commodity Futures Trading Commission. Against the yen, the dollar last traded little changed at 79.42 yen.
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