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Ibex 35 Euphoric Thanks to Spanish Risk Premium’s Fall

In Spain

MADRID | By Francisco López | The risk premium has moved from being a huge torment for Spanish decision-makers, to making headlines showing a recovery of the international confidence in Spain’s economy. The interest rate of the Spanish 10-year bond is at its lowest since 2009, the differential with Germany is around 190 basis points and Ibex 35 widely exceeds 10,000 points.

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Investors’ euphoria reached all peripheral countries due to a lower risk perception and to the success of Ireland’s first auction after the end of its bailout. In the case of Spain, the differential with Germany has reached the levels forecast by analysts for the end of the year. For its part, the Spanish Ibex 35 went up by 2.9% last Tuesday, and it recorded 10,178 point, which are maximum levels since July 2011.

One of the reasons for the improvement of the Spanish Stock Exchange is the banking sector’s good performance, which benefited the most (together with Spain’s Treasury) by the sharp fall of the risk premium. In the last year, the banking sector became the best client for the Spanish public debt. As a matter of fact, the sector hoarded 33.8% of all the outstanding debt by the end of 2013’s first semester (the maximum level since 1995).

The risk premium’s fall is also essential for the state coffers. This year, the Spanish Treasury should get the record figure of €244 billion, of which more than half are medium and long-term bonds. The financial burden will go up to €36,6 billion, according to the General State Budget. If everything continues the same, Spain might save up to €4 billion.

The international perception of the potential risk in Spain has improved, as we can see by the fall in its risk premium and the easiness for the Treasury to sell its debt. However, the most important element is the amount of direct investments in Spain by foreign companies.

For the first time since the beginning of the crisis, the value of the foreign direct investments in Spain (up to €515 billion) exceeded the value of the Spanish investments outside the country (€473 billion), according to the Bank of Spain.

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