Italian contagion pushes Spanish spreads to near-record 414 basis points
A translation from El Pais:
Since last summer, markets have made it clear that they are more suspicious of the Italian government than the Spanish, a sad sorpasso that Spanish authorities and analysts celebrated quietly. But now, the degree of distrust is such that the financial crisis threatens to overwhelm euro zone leaders. If the comparison is Italy, the punishment for Spanish public debt is lower. However, if the comparison is with Spain itself, the conclusion is far more unsettling: the risk premium has returned to levels that forced the European Central Bank to buy Spanish bonds (and Italian ones) en masse in early August.
As noted last week by the Prime Minister José Luis Rodríguez Zapatero, the difference in perception of investors about the pace of reforms and the political situation in Italy and Spain has also altered the perception of risk. After the last of the three rescues by the EU (Portugal, in April), according to the forecasts of the most pessimistic experts, the Spanish economy was next. Now, with the re-emergence of financial stress, it is Italy that has been at the centre of this most dangerous scenario. The punishment their sovereign bonds have received is now as intense as that which forced Greece, Ireland and Portugal to seek aid. Things are not gone so far in the Spanish case.
Nevertheless, the fate of Italy and Spain is linked in the eyes of the markets. The Spanish risk premium – differential with the yield on German ten year bonds – has now reached 414 basis points, close to the 417 that set the maximum reached in early August…
French and Belgian spreads are also near records as well. We are experiencing a European bond market crash. There’s not much time left. Make your trades now because a policy response is imminent; I’m thinking by Monday morning.