Monti’s resignation announcement pushes up Spain’s risk premium

Spain’s risk premium rose on Monday on the tail of Italy’s after Italian Prime Minister Mario Monti said he would step down following Silvio Berlusconi’s decision to withdraw his support for the technocrat’s government.

At midafternoon the differential between the yield on the benchmark Italian 10-year government bond and the German equivalent was up 29 basis points at 352. In the case of Spain, the risk premium climbed 16 basis points to 432.

Monti announced that he was resigning on Saturday night to allow more time for investors to absorb the move. “I preferred the decision and the announcement to occur on a day when the markets were closed, with 24 to 36 hours to absorb the eventual shock, naturally hoping that the shock would not happen,” Monti told the daily La Repubblica.

Spanish Economy Minister Luis de Guindos said the government was still considering asking for the assistance of the European Stability Mechanism (ESM) in order to trigger intervention in the secondary sovereign debt market by the European Central Bank, but added that external factors are key in terms of market turbulence.

“When doubts arise about a country as close as Italy, which is also perceived as vulnerable, then immediately we suffer contagion,” De Guindos told state radio RNE. “The help Spain needs is for uncertainties about the future of the euro to be eliminated. That is the main aid.”

De Guindos said the administration would decide whatever was best for the domestic economy. “A bailout is not like pressing a button,” the minister said. “A bailout has a large amount of implications for the Spanish and European economies.

However, analysts said the market is not expected to return to the situation of July when Spain’s risk premium jumped to levels of around 650 basis points.

“At the moment there is an instrument with enormous power to limit [bond price] movements, which is the possible purchase of bonds by the ECB,” Reuters quoted Citigroup strategist in Madrid, José Luis Martínez, as saying. “We will see some more tension in the market, and perhaps less interest at bond auctions, but we’re not going to see a return to the rise in interest rates that we saw before the summer.”

Even at current levels, De Guindos acknowledged that the risk premium was putting a damper on economic recovery. “With a risk premium of between 400 and 450 basis points, it is very difficult for Spain to fund itself in the right way,” the minister said. It is necessary to reduce it; half of the spread is due to doubts about the euro.”