The risk premiums were for years the black beast of the countries of southern Europe, the dreaded financial term that became a common expression among the citizens of Spain, Italy or Greece and that in the collective imaginary has become. His overflowing rebound in 2012 imposed a strict austerity policy in response to a debt crisis that put the ropes to the euro zone as a whole. Years later, those feared risk premiums faded at the lowest levels since 2009. The sovereign risk of the euro zone is finally suffocated, although not definitively buried: and high levels of debt and public deficit. Its risk premium, on the edge of the 70 basic points, is approaching the Italian, which has stabilized in the 80s, while the Spanish remains in 56. With everything, none of the states of the euro zone has a differential greater than 80 from Italy.
The risk premium reflects the extra profitability that the market requires by the bonus of a certain country with respect to the German debt, considered the safer in the euro zone. The differentials were very low before the bankruptcy of Lehman Brothers and the financial problems (aggravated by the distrust of the market) in southern Europe, more Ireland, which created an abyss between the safety of German sovereign debt and the risk of acquiring peripheral bonds. That descent journey, until the gap at its lowest level since 2009 has been long and traumatic.
The Spanish risk premium, which precipitated the request for the rescue to the bank and the Italian had reached maximum shortly before the 550 basic points. After a drastic shock plan to reduce deficit and debt with which to restore investors, other voltage episodes occurred in the following years, although of much less magnitude. Italy, plunged into multiple government crises, has been the last country to straighten its risk premium towards a sustainable level, which still climbed on the 200 basic points in June 2022. Throughout the process the ECB has played a key role, which has created a new mechanism – called – with which to act rapidly before a rebound in unjustified risk premiums, the result of financial speculation and non -imbalance economic. In this way the containment dike erected in the worst moments of the crisis: Draghi’s message in July 2012 announcing that he would do everything necessary (“whatever it takes”) To avoid the breakdown of the euro.
With this safety network, Spanish and Italian risk premiums, protagonists of that summer, remain comfortably below 100 basic points. The Portuguese is also in the 40 points, and the Greek almost codes without complexes with the rest, at the 64 basic points, very close to the French. “The differentials of the peripheral countries have been going down without interruption for three years. France is an exception due to. In the countries of southern Europe the opposite occurs: a reassuring economic growth (especially in Portugal and Spain), a relatively controlled public spending and a political risk currently low,” explains François Rimeu, senior strategist of Credit Mutuel Asset Management. In Spain, although economic growth allows the level of indebtedness to continue to decrease, to 103.4% of GDP, almost two percentage points less than a year ago. The IMF in fact calculates that Spain will be this year the developed economy that grows the most, around 2.5%.
Roberto Scholtes, Chief of Strategy of Singular Bank, acknowledges that “extreme risks have dissipated although fiscal discipline in the euro zone remains a problem”, in view of ratios such as the level of debt over GDP of Italy, 129% at the end of last year, or 112% of France, which adds to a public deficit of 5.8%. In fact, in Scholtes’ opinion, the key to the generalized decrease in the risk premiums of the European periphery to the current minimums is not so much in the fiscal merits of these countries but in the rise in profitability of the German bonds. Germany has a debt level on enviable GDP, at the edge of 63%, but that will rise slightly in the coming years. Thus, the performance of the German bonus at ten years – reference to determine the risk premiums – is 2.76%, near the annual maximum, compared to 2.2% of a year ago; In this same period, Spanish has risen less than half, 25 basic points.
“Germany’s decision to increase its budgetary expenditure, together with the flexibility of the EU internal standards regarding security related expenses, has also contributed to the compression of peripheral differentials,” Rimeu coincides, which also points to the role that the funds of the NextGeneration program are playing in the impulse of the economies of southern Europe.
David Ardura, Investment Director of Finaccess Value, also cites the fact that the current populist movements, to the boom throughout Europe, no longer propose the abandonment of the euro, while the EU has given clear signs of its commitment to the European project, such as the flexibility of fiscal rules to assume a greater expense, first before the pandemic and today, before the challenge of elevating the investments in defense and infrastructure. “With the exception of France, if the debt and deficit indicators of the euro zone are compared with those of the United States or the United Kingdom, Europe is more fiscally ordered,” adds Ardura, which explains that recent tensions in the debt market have focused on the British and American bonds, after Trump policies have even questioned the exceptionalism of the US economy In any case, a certain complacency in the market towards the sovereign debt of the European periphery and prefers to seek refuge in German debt.
For Scholtes, risk premiums could rise in the coming months, in view of the fact that France is still facing the challenge of carrying out the budgets with which to reduce its deficit and that the ECB will continue to reduce its balance. The Central Bank has already stopped reinvesting the debt that is overcoming, at a rate of 440,000 million euros a year. These purchases were in fact key to quell the debt crisis. Proof that this time was left behind, the Spanish risk premium would not go this year far beyond the 70 basic points, as they estimate in singular Bank.
