Spain is no longer Europe’s sick man; it’s Italy’s turn

Spain’s sovereign debt has been improving in the last weeks. Before Thursday’s crucial ECB’s meeting, 10 years bond yielded under 3.40%, an unprecedented level since 2006 prior to the crisis. Spanish risk premium is under 180 basis points, at the same level of Italy’s, which suggests investors’ appetite for peripheral countries’ debt.

The increasing recovery of Spanish debt coincides with two relevant facts: recommendations of buying Spanish Treasuries coming from investment banks and international funds, as well as market expectations over ECB’s possible non conventional measures to refrain low inflation.

Investors not only take these temporary factors into account, but also others that can be applied to peripherals’ debt: its higher profitability against euro zone core countries’ bonds (Germany, Finland and The Netherlands) and the increasing recovery of their economies.

The interest in Italian debt has stood even under that of Spanish, which additionally proves that investors often ignore recommendations from the European Comission. Brussels published a report on the euro zone imbalances on Wednesday that pointed Italy as the new sick man of Europe, basically due to its high public debt and the lack of reforms.

Spain is no longer Europe’s sick man, but it does hold the highest unmeployment rate along with Greece. Market watchers consider that risk premium will go down even strongly to 150 basis points, only when Spanish economy is able to grow more than 1% and maintain a sustainable job creation. And of course, whenever the ECB is capable of solving euro zone fragmentation.

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