| With
growing concerns about the strength of the European Stress Tests,
the bond market of the Spanish Government has rallied in recent
days, reducing the country’s cost of borrowing on the capital
markets. With the results of the European Stress Test of big banks
due to be revealed on Friday, many investors predict that the Spanish
Government will benefit more then its troubled Euro neighbours.
Due to the fact that Spain
has an extra interest it has to pay investors to buy its debt, puts
Spain in the enviable situation of edging out Germany, which is
widely consider the safest borrower. This “risk premium”
was 1.64 percentage points on Wednesday compared with 2.1 percentage
points just a week ago. Fellow troubled Euro Zone countries such
as Ireland, Portugal and Greece have not seen that kind of improvement.
With light at the end of
the tunnel being clearly seen, even traders in the derivatives have
seen a dramatic drop in the cost for Spain to insure its government
bonds against default. It now costs $205,000 a year to insure $10
million of Spanish government debt compared with $274,000 on June
29 – a 25% drop. In the banking sector, one of Spain’s
largest banks, BBVA has seen an increase in their shares, rising
to €9.50 from about €7.50 in mid-June.
With investors now starting
to experience positive feelings about Spain’s banking system,
the Euro Zones fourth largest economy, which was recently proclaimed
as the next Greece, experts have several reasons why there is an
improvement in the bond market in Spain. Together with the emergency
rescue plans that European leaders and the ECB have launched, the
positive influence that Spain’s banks will pass the Stress
Test with honours and the fact that Spain has been allowed to raise
money from the capital markets without a problem, have given investors
an increased optimistic view of Spain.
Even though Spain’s
economy is still week, the country is in the process of consolidating
the week Caja’s to increase banking stability. There have
also been reports that government costs have also been reduced together
with further reports of strong interests in foreign investment,
including China.
With the looming €16
billion debt that is due to be paid by the end of July, those who
were worried once are not worried anymore. Even though its not going
to be plain sailing for Spain, given how gloomy things got just
a few weeks ago and the easing stress in Europe’s financial
system, there’s a chance we’ll see more sun in Spain
than some market bears expect.
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