Italy And Spain Damage Investor Sentiment

Appetite for risk dissolved today in the face of yet more sovereign debt concerns and worrying economic signals. It was the two countries regarded as the safest of the “PIIGS” – Italy and Spain – that damaged sentiment, according to Markit Credit Research.

“With a general election in Portugal next month and local elections in Italy, political instability could yet create more spread volatility over the course of the year.”

Gavan Nolan


With Europe in a total financial chaos, without someone to lead the economic rescue operations, it’s no wonder investors are a bit sceptical. Another round of bad news sort of nailed the day in credits, Monday.

Late on Friday S&P placed Italy’s “A+” rating on negative outlook, citing the “heightened downside risks” in the government’s debt reduction programme.

Specifically, the agency highlighted the country’s weak growth prospects and the lack of political commitment to reducing the public debt burden (about 120% of GDP).

S&P did acknowledge that Italy’s budget deficit was smaller than the other peripheral euro zone countries, and that its banks have better quality balance sheets.

“These two factors help explain the relative stability in Italy’s spreads compared to the other peripherals,” credit analyst Gavan Nolan at Markit Credit Research writes in his Intraday Alert.

Adding: “Spain is not fortunate enough to be able to claim the same, and its economic problems are causing problems for the government.”

Over the weekend, the incumbent Socialist Party suffered a major defeat in regional and local elections, including the loss of strongholds such as Barcelona and Castilla La Mancha.

While a resounding defeat was expected, the result showed just how difficult it will be to maintain social unity in a time of austerity, Nolan points out.

There is talk of bringing forward the general election to this year, though this has been dismissed by prime minister Zapatero.

“With a general election in Portugal next month and local elections in Italy, political instability could yet create more spread volatility over the course of the year.”


The events in Italy and Spain temporarily took attention away from Greece.

“But the fate of the Hellenic Republic is central to how the debt crisis will unfold, and the uncertainty surrounding the country is set to shape sentiment until the denouement, whenever that may be,” Gavan Nolan writes.

The government met today to approve a fifth austerity plan, and there are reports that the EU and IMF will require them to quicken the pace of state assets sales in order to receive bailout funds.

“The country’s capacity to withstand yet more austerity is questionable and is only likely to heighten speculation around debt restructuring,” the Markit analyst states.

Away from the travails of the periphery, markets were also troubled by disappointing economic leading indicators.

The preliminary estimate of the Markit/HSBC China Manufacturing PMI showed that the world’s second-biggest economy is continuing to cool.

“The index dropped to 51.1 in May, a 10-month low, and added to fears that monetary tightening could lead to sharp slowdown,” Nolan comments.

Germany, another of the world’s growth engines, also saw its rate of expansion slow.

The Markit Flash Composite PMI came in at 56.4, still indicating growth but the lowest reading since October 2010.

“Signals that China and Germany are running out of steam will put even more emphasis on the US and the ISM number at the beginning of next month,” Gavan Nolan concludes.

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4 responses to “Italy And Spain Damage Investor Sentiment

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