Markets tumble and borrowing costs rise as Spain, Italy face crises

Ongoing political and institutional crises in Spain and Italy are rattling the markets and pushing up borrowing costs.

Traders and investors appear increasingly jittery about recent events in Italy, where an interim prime minister has been appointed to lead a temporary government after the president vetoed a populist coalition’s proposed economy minister.

The Spanish blue-chip Ibex 35 retreated nearly 2.5% in Tuesday morning trading

And in Spain, Prime Minister Mariano Rajoy is facing a no-confidence vote in Congress later this week, even as his government struggles to deal with the crisis in Catalonia – where a new government is yet to take office as well.

The Spanish risk premium – the spread between the 10-year Spanish government bond, and the benchmark 10-year German bond – reached 143 basis points before noon, before falling to 135, which was still 15 points higher than late Monday. In Italy, the spread between government bond yields and the German benchmark was above 300 points.

During the toughest years of the crisis, the risk premium was considered the test of an economy’s health and a measure of investor confidence. In 2012, Spain’s risk premium was in excess of 500 basis points, triggering fears of a bailout.

The nervousness has also been felt in the stock markets, which took a tumble. The Spanish blue-chip Ibex 35 retreated nearly 2.5% in Tuesday morning trading, dragged down by losses in the banking sector: Santander (down 5.8%), Sabadell (down 7%), Bankia (down 5.1%); BBVA and CaixaBank (down nearly 4%.). All listed shares were in the red, and 16 out of the 34 companies included in the benchmark index lost more than 2%.

Bank of Italy Governor Ignazio Visco has already warned about the risks looming over Italy if it does not honor its international commitments, and said that the country is just “a few steps away” from losing investors’ trust. His comments were aimed at the League and 5-Star Movement, whose joint economic program includes radical tax cuts, a citizen’s paycheck and earlier retirement.

English version by Susana Urra.