An increase in Italy and Spain’s risk premium

An increase in Italy and Spain's risk premium

An increase in Italy and Spain’s risk premium

Uncertainty regarding election results in Italy and concerns of corruption scandals involving Spain’s Prime Minister, led to a rise in the risk premium of the peripheral countries in the last two weeks, fearing that the possible change of government in both countries will affect the implementation of the necessary austerity measures.

Mariano Rajoy, Spain’s prime minister, which led a series of austerity measures since the elections, is facing opposition to resign amid reports regarding envelopes of money he received illegally.

In Italy, a survey conducted on February 1st pointed to the closing of the gap between Berlusconi and the Left Party’s leader, pier luigi bersani, to a level of only 5%.

We note that Berlusconi threatens the ability of bersani to win a majority, even if the latter continues to lead in the polls.

We note in this context the statement of Mario Monti, Italy’s Prime Minister and head of the Center Party, that:

“Berlusconi wants to buy the votes of Italians with the money that Italians had to turn over to cover up the shortfall left in the public accounts by Berlusconi, who governed for eight of the past 10 years”.

Regarding the economic data, we note that the trend that was witnessed during the last two months, deterioration in data of the current situation, but an improvement in investors’ and companies’ estimates of the future growth.

Retail sales in the Eurozone declined for the fifth consecutive month, another indication to the contraction of European GDP in the 4th quarter.

On the positive side, we note that the Composite PMI surprised upwards in January, as it rose to 48.6 (the highest level in the past 10 months), compared to a level of 47.2 in December.

Nevertheless, a substantial difference was recorded in January in the future expectations of the two leading economies in the Eurozone.

There was a relatively sharp increase in Germany and a decrease in France, a fact that may increase the political disputes between the two countries.

The dilapidated economic situation of the French economy led the French President, Francois Holland, to call governors around the world to avoid “Currency Wars” which have recently led to the strengthening of the Euro, a fact that had been harming European exporters.

As of today, it seems like the Euro is on the losing side of the war due to the fact that parallel to the continuation of the quantitative easing programs in the U.S. and in Japan, the balance of the ECB is actually in a downward trend.

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