Nervous investors have tended to worry about Italy and Spain at the same time since the euro crisis began: a default in either country, they feared, would blow up the euro. But this time Spain seems to have avoided contagion from its neighbour for now, at least.
After last week's Italian election, Spanish ten-year bond yields leapt alongside those of their Italian counterparts, but by early this week they had fallen back from about 5.4% to 5%, as investors recovered their poise and kept buying Spanish debt. So why the confidence in Spain this time?
For starters, says Nick Cawley in The Wall Street Journal, the European Central Bank helped calm nerves: last year it promised to buy up peripheral debt to help avoid a default. During previous instances of contagion, this backstop wasn't available. There are also grounds for optimism within Spain. The government has a strong majority and there is no election due until 2015, so political instability is less of a problem than elsewhere.
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Moreover, says Hugo Dixon on Reuters.com, Mariano Rajoy, the prime minister, "is a dogged reformer" whose overhaul efforts "are beginning to have aneffect". Unit labour costs are declining, boosting competitiveness. Cheaper labour has encouraged car firms to bolster production in Spain.
In the banking sector, creating a "bad bank" to collect dud loans has freed up bank balance sheets for lending. "The economy is no longer plagued by zombie banks diverting their limited funding to zombie property companies." Measures to defer early retirement are also positive.
Nonetheless, the recession has hampered efforts to curb the deficit, which is still worth 6.7% of GDP. Spain is set to miss its target of reducing the overspend to less than 3% next year. Yet more austerity in order to reach the target would deepen the recession and thus make the debt problem even worse. So Spain wants to extend its 3% target by two years.
Provided the structural reforms continue, other states should agree to this, reckons Dixon, in case austerity fuels further populism in the periphery after Italy's election. Then Spain's reform programme will have a better chance of laying the foundations for lasting growth. Investors sense that Spain could "see a silver lining from the Italian cloud".
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