The situation in Spain is radically different from that in Italy. The macro environment is much better: economic confidence is still very high, it is consistent with strong growth of around 3.0% and the unemployment rate is falling rapidly. Therefore, although the motion of censure goes ahead, in our opinion, it will not create a political crisis, because much more is needed to break the good economic dynamics of Spain, since the country does not have any urgent problem that a government must resolve.
We believe that the movement in Spanish country risk has been influenced more by what has happened in Italy, than by internal political events. In fact, it is expected that the Spanish budget deficit will reach 2.5% in 2018 and the debt / GDP ratio has started to fall, so if the growth remains at the current level, the risk of the Spanish debt upgrade to.
If early elections are called, according to the latest polls, Citizens, a pro-European party, could win them. The most worrisome scenario would be a coalition government formed by PSOE and Podemos, although in that case it would depend on the respective weight level of the two parties. If the PSOE “has the upper hand”, it could be able to dominate the euroskeptic tendencies of Podemos. However, it must be said that the three main political parties (Citzens, PP, PSOE) share the commitment to the euro and, therefore, respect the Stability and Growth Treaty.
What is affecting the Spanish debt market is the situation in Italy. If the concerns about a possible exit from the trans-alpine country of the euro zone increase a lot, there could be some contagion and the Spanish debt could be under pressure, but in such a scenario, the ECB could be tempted to delay the decrease in purchases after September. In addition, as long as the political consensus to remain in the euro remains solid, if spreads expand, they could provide a buying opportunity.
In equity markets, as long as the Italian situation is not sorted out, the markets should remain volatile and we can attend times of panic. However, the economic context remains positive, with good global economic growth, which, in turn, supports the growth of earnings per share. The problem is that during these crises the market does not pay attention to this health, but if the fear recedes, the bags should bounce.
In addition, in forex, if everything settles down, we think that the EUR should recover and return to a strengthening trend as the ECB normalizes its policy. Keep in mind that the dollar has strengthened in recent weeks in a movement that started even before the market began to worry about Italy, because investors have discounted an increase in interest rates in the US.
Julien-Pierre Nouen, Chief Economist at Lazard Frères Gestion