Risk premium sees biggest weekly drop since the euro was created

Spain’s risk premium continued to narrow on Friday a day after the European Central Bank approved a new unlimited bond-purchasing program to ease the pressure on financially-distressed euro-zone.

The yield on the benchmark 10-year government bond fell below 6 percent for the first time since May and closed at 5.645 percent. That caused the spread with the German equivalent to fall by 37 basis points to 412. That came on top of a decrease of close to 50 basis points on Thursday. For the whole of this week, the fall was 141 basis points, the biggest weekly drop since the euro came into existence.

The blue-chip Ibex 35 index opened Friday’s session with a gain of 2 percent on top of the close to 5 percent it put on this Thursday, However, by the close it was up only 0.26 percent at 7,882.80 points as profit-taking set in.

“This is the first time the ECB seems to be gaining control of the situation,” Bloomberg quoted Johannes Jooste, a senior strategist at Merrill Lynch Wealth Management in London, as saying. “The initial market reaction suggests it has faith in Draghi.”

The more the risk premium falls, the more room the government of Prime Minister Mariano Rajoy has to put off the decision whether or not to seek a second bailout from the European rescue fund, on top of the up to 100 billion euros pledged by its European partners to recapitalize the country’s banks.

Draghi conditioned bond purchasing to euro-zone members first formally requesting assistance from the European Financial Stability Facility (EFSF), and its permanent successor the European Stability Mechanism (ESM), in the shape of buying the debt they issue in the primary market. He said such aid would be accompanied by “strict conditionality.”

Arturo Fernández, the deputy chairman of the Spanish Confederation of Business Organizations (CEOE), the country’s biggest employer group, on Friday urged Rajoy to seek a second bailout “as soon as possible.”

“We are in a country on the border of suspending payments, and when a company is going badly, the alternative is to ask for help,” Fernández said in an interview with local radio station Cope. “Rajoy may ask for a bailout but time is running out and a decision needs to be made as soon as possible.”

Deputy Prime Minister Soraya Sáenz de Santamaría said that the decision of whether or not to ask for a second bailout was not one that could be taken “on the hoof, nor from one day to the next.”

“Matters of such importance for the general interest and the future of Spaniards need to be analyzed with a lot of calm and prudence,” the minister said after the regular Friday Cabinet meeting.

She said the government expects to receive more details about the conditions attached to ECB intervention at the Eurogroup and Ecofin meetings due to be held on September 14 and 15, respectively.