At the end of June of this year Italian spreads over German bunds were lower than Spanish spreads by 60 basis points, 0.6%. One month later both countries were perceived as equally risky by investors. After that Italy became increasingly more risky than Spain. It has remained more risky ever since.
Then came Monti. When elected, the situation was exactly the opposite than in June: 60 basis points higher were Italian yields this time. Monti quickly created enthusiasm in financial markets and one week into his mandate the spread was down to 22 basis points. It was the same day in which Rajoy won elections in Spain, with many doubting on the Spanish conservative to generate successful policies.
After that, however, the honeymoon with Prof. Monti and the markets ended and started the one with Rajoy: the spread between Italy and Spain rose to 83 basis points on December 5, then 111 on December 14, then 166 on the 19th, the day in which Dr. Rajoy addressed the Parliament with his programme.
Markets are volatile we know. And things might change quickly in the near future. But something must have convinced investors; something must have been more credible in Dr. Rajoy’s policies than in Prof. Monti’s ones, I told myself.
So I downloaded Dr. Rajoy’s speech and while my Spanish is quite shaky I think I got the gist of it, and I think I know why Spain is faring better in market’s hearts. Mind you however: it is not true that Spain has an easier task than Italy in begining to solve its problems. True, Spain has a bit more than half of the Debt over GDP ratio of Italy but it also has more than than double its unemployment rate.
So here are my reasons of Spain’s current leadership over Italy:
Spanish upside over Italy n. 1: fiscal stability will be achieved but not by 2013, but by 2020. This allows for less recessionary measures in a very dark period of the economy. There will be less social tensions, more output growth and thus more space for credible reforms. markets like that, for sure. I do too by the way.
Upside n. 2: Rajoy gave a 360° (bold) program (plan) that encompassed all issues relevant for Spanish society. Exports, education, public sector, work, energy …you name it! He thus gave a sense of being capable of mastering a complicated administrative machine but also of having a sense of direction for the future of his country. He is also a politician, who has the goal of succeeding so as to win elections again, you might say. Absolutely, and that is a good thing that pushes him to embrace growth-oriented policies. Yes, I like that too.
Upside n. 3: Rajoy is clearly concerned about the social cohesion of his country. Pensions for the weakest are about the only thing for which he asked higher expenditures. Labor market reforms, after being discussed with trade-unions, must go in the direction of strengthening the rights of workers while making employment entry easier. This creates an environment conducive to calm industrial relations and therefore to greater stability.
Upside n. 4: Rajoy clearly gave a big weight to the issue of achieving better government. He indicated that waste in public procurement of goods and services would be cut also through tools of centralization. Spending cuts of waste are not recessionary: they free up space (resources) for more public demand with no greater deficit, boosting immediately growth.
I am not surprised that markets are rewarding (promises of) growth and thus credible stability over non credible stability because of lack of growth. Are you surprised?