* Euro seen vulnerable after Spanish bailout request
* ECB bond plan buys time, does not solve crisis
* Euro zone growth concerns likely to come to fore
By Nia Williams
LONDON, Nov 5 Spain's apparent reluctance to
seek financial aid means any eventual request may trigger only
modest gains in the euro, as investors focus on the currency
bloc's gloomy economic outlook.
The European Central Bank unveiled a plan in September to
buy the bonds of countries that ask for assistance, dragging
Spanish yields down from unsustainable levels and driving the
euro to its highest against the dollar since May.
But two months later, and with no sign of a move from
Madrid, the wave of optimism that swept the market is fading and
investors are again fretting about a potential lost opportunity.
The bond-buying plan was seen as a rare example of decisive
action by policymakers to resolve the crisis and the delay in
activating the programme has raised concerns they may once again
put off painful steps that would be unpopular with voters.
In these circumstances, concern about the euro zone's
underlying economic weakness, which was masked by the
bond-buying plan, is again to the fore.
"The danger with a request in future is it's more likely to
come from a position of weakness when (Spanish) bond yields
start to move higher," said Steve Barrow, head of G10 FX
research at Standard Bank.
"If Spain had made an immediate request when sentiment
towards the euro was more positive we might have anticipated a
Bond yields have risen across the euro zone periphery since
mid-October, pushed higher by uncertainty over Spain and over
whether Greece will secure the aid needed to stop it going bust.
The euro hit a two-month low on Monday before the Greek
parliament votes on Wednesday on austerity measures demanded by
Athens's lenders. Rejection would see the euro fall as fears
grew of Greece leaving.
Many analysts said the single currency could be also
vulnerable to selling once the ECB began buying bonds, even if
an initial knee-jerk rise followed a Spanish bailout request.
Ian Stannard, head of European FX strategy at Morgan
Stanley, said he expected an aid request by year-end that would
help the euro, now around $1.28, rise to $1.34 before
retreating to $1.25 by mid-2013 as attention switches back to
euro zone growth concerns.
Other strategists were more sceptical, saying the euro may
struggle to break free of the $1.28 to $1.3170 range where it
has traded since mid-September.
Because a bailout request is so widely anticipated, any
resulting gains are likely to be fleeting, traders said. Many
investors who are upbeat on the euro are likely to have already
bought and may be wary of adding more.
The euro has risen 2.5 percent since the ECB announced its
bond-buying plan on Sept. 6, and positioning data showed
speculators slashed their bets against the euro by nearly 50
percent over the same period.
The options market also suggested the euro would be stuck in
a range in the near term. Euro/dollar implied volatility - a
measure of expected price swings - is at its lowest since
Lehman Brothers collapsed in 2008.
One-month risk reversals - showing the
premium charged to lay bets on a euro fall - have declined
since September to show only a slight bias for weakness ahead.
"The bailout is already built it. Spot is in gridlock and
when people stop buying options it reinforces that sentiment,"
said Steven Rendon, head of G10 vanilla options at HSBC.
Many strategists expect a bailout request from Spanish Prime
Minister Mariano Rajoy before year-end, despite his apparent
reluctance to submit to strict conditions from the ECB.
But euro zone unemployment and growth figures have both
worsened while markets have been waiting, a reminder that
central bank action alone cannot solve the bloc's economic
problems. Only feeble growth is expected in 2013.
Some in the market see a risk the ECB's pledge to buy
"unlimited" amounts of sovereign debt may fall short of market
expectations or face opposition from Germany.
During the now-defunct Securities Market Programme the ECB
spent 209 billion euros on buying peripheral bonds. Analysts
expect it will have to spend at least that amount again to keep
yields in check under the new programme.
"The most critical point for the euro exchange rate will be
whether the ECB acts as aggressively as the market has priced
in," said Ulrich Leuchtmann, head of FX research at Commerzbank,
who said the euro could fall to $1.23 by year-end.
Another concern is that the ECB's promise to back-stop debt
markets could inadvertently knock the euro lower.
Standard Bank's Barrow said investors who would normally
express concerns about euro zone countries missing budget
targets through selling government bonds may be tempted to sell
the euro instead. He forecast the euro at $1.15 in six months as
recession spreads north into core Europe from the periphery.
Even those investors who believe the single currency will
rise as the ECB plan removes the risk of a Spanish default were
pessimistic about the euro zone's longer-term growth outlook.
"There's a changing mentality in Europe and pressure on
central banks to do more. That ends up supporting zombie
economies through money printing," said Clive Dennis, currency
manager at Schroders, who is "modestly bullish" on the euro.
"So we work off these debts over a long period of time and
there is no growth over a long period of time, but there's no
collapse. That's the best case scenario."