Is the Eurozone Debt Crisis Back?5. February 2013 by Herman Brodie
Allegations of a political slush fund in Spain and anti-reform electoral promises in Italy combined to do some meaningful damage on the respective stock markets yesterday. But why?
About Spain, commentators say the allegations might precipitate the premature departure of the prime minister and herald new elections with an uncertain outcome. This should justify a risk premium in equity markets. Yet, a popular prime minister (at least popular in the markets) resigned in Italy recently and elections were called whose outcome is similarly uncertain, but this did not derail the market. Why should it do so in Spain?
Ah, one might say, but the Spanish prime minister might remain in office even though he has lost the confidence of the people. Yet in Greece (and in other countries), a government was elected that didn’t command the full confidence of the people and this did not derail the stock market either. So what is it that investors are worried about?
In short, it comes down to the reform processes underway in these countries. Investors fear the election of a government who will not comply sufficiently with the insistences of creditor countries like Germany, and thereby keep the financial support intact. Whether the political leaders are honest or not, whether they stay in office or not, is not the issue: the only thing that matters is their compliance.
If this is the sole concern, there is nothing to worry about as there is hardly a politician in Europe who would upset the cart and throw away all of the improvements in funding conditions achieved over the last few months – not even Silvio Berlusconi.