Staying Euro

Following a downgrade by credit ratings agency Moody’s on Wednesday, Spanish bond markets were jittery—benchmark Spanish Treasury yields clipped their euro-era highs around ~7.0% on Thursday. Moody’s noted Spain’s weak economy, limited access to financial credit markets and Spain’s recent bank bailout—which likely adds to their overall debt burden. In our view, this is yet another example of a credit agency confirming what’s already widely known.

Higher yields at market are certainly not great, but since Spain has addressed all of its longer-term maturing debt needs this year (and 58% of its planned total debt issuance for the year—though the bank bailout might increase their issuance), higher rates don’t seem disastrous to us at this point. As we’ve said in the past, rates needn’t stay where they are. They could rise still more, which would put additional pressure on Spain. But higher rates don't immediately flow through to Spain's entire balance sheet—the amount Spain pays on previously issued debt is unaffected. So a temporary spike in rates has limited impact. And keep in mind, in agreeing to Spain’s bailout request for help with bank recapitalizations, eurozone officials have once again projected their desire to continue backstopping areas of weakness in the periphery as necessary.

Likely contributing some to overall market jitters is Greece’s impending second round of parliamentary elections this Sunday. Most unease has centered around fears a radical leftist party gets enough votes to lead a coalition and reneges on the country’s previous bailout agreement—potentially forcing a disorderly exit from the eurozone and laying the groundwork for other countries to leave too.

But politicians are politicians. The Greek populace may not like the folks they blame for their current economic and fiscal conditions—and sent a message with the last election—but they still overwhelmingly support the country’s euro membership. Hence, Alexis Tsipras, head of the leftist Syriza party, has changed his tune just days before election. In the previous round of parliamentary campaigning, he was staunchly anti-austerity terms. Now he’s claiming passionate commitment to staying with the euro and backing away from his more radical propositions. Why? Tsipras was steadily dropping in polling. (Secret polling, no less. Greece doesn’t allow official polls within two weeks of election day—maybe that’s something else they can reform.) His solution was to shift to the center to appeal to a broader base of voters—pandering even before taking office! Which likely means, whatever the outcome on Sunday, a sudden “Grexit” is looking still more unlikely.