The risk premium pull of the last few days shows again the seams of the Eurozone. The solid rise in interest rates that the region’s sovereign bonds are experiencing is focused on its peripheral economies. A gap with which investors once again point towards two well-differentiated blocks within the single currency club.
The efforts deployed during this pandemic to make the Eurozone a cohesive block have begun to fade as soon as the European Central Bank (ECB) has raised a progressive withdrawal of its huge monetary stimuli, especially its debt purchase programs. While the central countries of the region have only suffered slight and very similar increases in the cost of their sovereign debt, the peripheral countries have experienced much stronger and more disparate increases.
The levels reached by the risk premiums of several of these peripheral countries speak for themselves. Without needing to go any further, this is being the case of the Spanish, which just passed 100 basis points. A level that he had not visited since June 2020, at the very beginning of the second wave of the pandemic, when the ECB’s shock arsenal had barely begun to take its first steps.
The same ones mentioned
In the case of Greece, the risk premium climbed this Monday to 238 basis points, while Italian paper marked a gap of 169 points. The growing abyss is more than evident against the 48 points of the ten-year bonds issued by France or, even more clearly, against the 17 points that mark the sovereign debt securities of the Netherlands.
Although this gap between the return that investors have been demanding from one paper and another is decisive, its recent evolution is even more so. And it is that the horizon of a gradual withdrawal of the ECB after long months of bulk purchases is what really seems to have revived in the market this awareness of a two-speed Eurozone.
The drive of the hawks
This appreciation is verified if the evolution of the risk premiums of each country is measured since November 28 of last year, when those known as ‘hawks’, members of the Governing Council of the ECB more in favor of withdrawing stimuli, began to raise their voices. While in this time the Dutch risk premium has barely risen 4 basis points, the Greek has done so by 119.
Although these are the two extremes of the Eurozone, between the strictest of the so-called frugal and the most penalized of the latest economic crises, the gap is repeated in all cases. In those same 78 days, the Spanish risk premium has increased by 37 points, while the Italian has accumulated 62 and the French has only been increased by 12 points.
For the time being, all these premiums -which are no more or less than the difference between the return that investors require from a country’s sovereign bonds compared to that required from their German peers- are remain a long way from the highs of the European debt crisis of the summer of 2012. However, the attention is clear to those who not so long ago were designated with the acronym ‘PIGS’ and ‘GIPSI’.
So, to the Spanish bonds at ten they were even required to yield 642 basis points superior to the one that the investors requested to take control of German ‘bunds’. However, in the barely 11 days that have passed since the president of the ECB, Christine Lagarde, left the door open to an eventual withdrawal of stimuli faster than expected up to that moment, the differential has increased by 27 points.
Commitment and withdrawal
In the same time, the French risk premium has only added 7 basis points. yes, though the market clearly points in the direction of the caboose of the Eurozone for the Spanish economy, the judgment is much more severe with Italy’s neighbors, whose sovereign bonds have suffered an increase of 31 basic points for their risk premium in the same period.
Regardless of when the ECB will begin its withdrawal, which in any case seems closer and closer, the market has already begun to differentiate which countries are better and worse prepared to consolidate their post-pandemic recovery without the buying support of the central bank on the other side of the issuance window. The all-for-one moves that kept sovereign bond premiums in the region at bay are overas evidenced by the following graph.
Beyond the efficiency that each national government achieves in successfully run the Next Generation funds, the starting point has become decisive in these latest market movements. While Spain’s indebtedness over its GDP reaches a ratio of 122.1% and in Italy it shoots up to 155.3%in Germany it remains at 69.4% and in the Netherlands it is limited to 52.6%.
With such a gap, the two-speed Eurozone re-emerges despite the fact that Lagarde has already learned her lesson and is clear that it must use “any necessary tool to ensure that monetary policy is properly transmitted to all member states” of the Monetary Union. A phrase with which he only a few days ago responded to a Spanish politician in the European Parliament and which is far from his fateful march 2020 speech.
debt per inhabitant
Fixed-income market analysts point to a good indicator to anticipate what investors can expect of the states’ ability to comfortably meet the obligations contracted with their bondholders lies in the per capita debt. A measure that, in addition, makes more visible what the effort of each country would have to be to liquidate its indebtedness.
While each Spaniard should face the disbursement of 30,263 euros to zero the counter, the Germans would have enough to put 29,262 euros each. In Italy, the figure shoots up to 45,672 euros per inhabitant, according to the latest available data, while dutch they would only have to assume a debt of 25,300 euros per head.