Spanish and Italian bonds are recovering after the initial sell-off today, sparked perhaps by the increasing anxiety as Greece and the official creditors near yet another brink.
This Great Graphic shows that the premium Italian (white line) and Spanish (yellow line) bonds offer over Germany. The premiums bottomed in March shortly after the ECB's sovereign bond purchase program was launched. At today's highs the premiums have doubled.
The euro bottomed around the same time. In the second half of March, through mid-May, the euro rose and the premiums widened. However, since mid-May the premiums have continued to trend higher, but the euro has not.
As unusual as it may appear, Italy is politically more stable than Spain. Both countries had local elections recently. In Spain, the anti-austerity Podemos made greater strides than the opposition in Italy. Spain will hold national elections later this year. The strong growth numbers Spain is posting has not shored up support for Prime Minister Rajoy and the PP. The Socialists appear to be trying to appropriate some of Podemos issues, but it may be too little too late.
Spain's better economic performance coincides, but not coincidentally, to the easing of the fiscal drag. The IMF warns that Spain has more fiscal consolidation to do, but it is not pressing hard now. There may be several reasons for this stance, but among them, arguably, is the desire to avoid if it can a repeat of the Greek saga. In this context, it means giving Rajoy some breathing space.
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