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Spanish and Italian Debt Woes Return, Cyprus a Question

Posted by Joseph Trevisani on Feb 11, 2013 12:28:00 PM
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Spanish and Italian Debt Woes Return, Cyprus a Question

The yields on Spanish and Italian 10-year sovereign debt have climbed more than 11% in the past month. Political uncertainty in Italy and Spain and the European economic decline have sapped the credit market confidence that was so dramatically restored by ECB President Mario Draghi last summer.


From the post-summer low of 4.153% for the Italian generic 10-year bond and 4.872% in the equivalent Spanish debt on the 10th and 11th of last month, rates have soared to 4.615% in Italy and 5.412% in Spain


Italians elect a new president to replace the appointed and since resigned Mario Monti at the end of this month. Former President Silvio Berlusconi's center-right party People of Freedom with between 28% and 32% of the vote has been gaining on Pier Luigi Bersani's center-left party with between 34% and 37% of the vote and his expected coalition partner Mario Monti with  between 13% and 14% of the vote.  Mr. Berlusconi has said that the German imposed austerity of Monti's government is stifling the economy and has promised to repeal a four billion euro property tax.


Though Mr. Bersani is still expected to win, a strong showing by Mr. Berlusconi will make governing and further austerity difficult for any Bersani-Monti government.


In Spain Prime Minister Mariano Rajoy and officials of his People's Party (PP) have been accused of receiving illegal cash payments from the treasurer of the party.  Mr. Rajoy made public his tax returns for the past ten years and the PP for the past four in an effort to quell the accusations.


The political difficulties in both countries have made the continuing reform efforts of their economies problematical.  Rising interest costs could make if difficult for deficit countries, like Spain and Italy to fund their budgets at affordable rates.


This was the situation last summer when Spanish and Italian 10-year rates  rose above seven percent until  brought down by ECB President Draghi's threat to defend the euro at all costs. 

Mr. Draghi did not have to back his threat with central bank action but the condition that he set for intervention in the Spanish debt market  may yet come back to haunt him. The ECB will not buy Spanish bonds until the Madrid government asks for and accepts the terms of an official, IMF, EU and ECB bailout, something the Spanish government has said it does not need and will not request.


Cyprus was the fifth European Monetary Union country tor request a bailout when it sought aid eighth months ago. Negotiations have been proceeding since then but no decision is expected until after the presidential election later this month. The Cypriot economy and financial sector are heavily exposed to Greece and the banking system in particular needs a large infusion of capital if it is to stay solvent.


Finally, the Eurozone economy is expected to have shrunk 0.4% in the fourth quarter when the statistics are published on Thursday.  It would be the worst performance since the 2.8% drop in the first three months of 2009.  Seven of the 17 nation in the EMU are in recession


Spanish and Italian sovereign rates are not yet at the crisis levels of last July, but if the ECB's bluff is called by the credit markets a Spanish bailout is probably the only solution.

With official euro zone uneployment at 11.7%, Italian at 11.2% and Spanish joblessness over 25% no EU politician, except maybe Germany's Angela Merkel, has a very secure seat. 


Joseph Trevisani

Chief Market Strategist



Charts: Bloomberg



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