Spanish government bond yields are down substantially from their highs last week, but the European sovereign-debt crisis hasn’t taken a turn for the better. On Wednesday, Italy said that its goal of balancing its budget by 2013 wouldn’t be met – introducing a forecast for a deficit of 0.5 per cent of gross domestic product. Last month, Spain said that it wouldn’t meet its deficit goal this year.
Part of the problem stems from a deepening economic slump in the region. Italy now sees its economy shrinking by 1.2 per cent this year, which is considerably worse than an earlier forecast for a 0.5 per cent contraction. The International Monetary Fund believes that even this new forecast is overly optimistic, predicting that Italy’s economy will contract by 1.9 per cent this year.
Although European countries, including Italy, have been imposing austerity budgets in an effort to rein in spending, declining economic growth has rendered those efforts largely ineffective – a reaction that austerity critics like Paul Krugman have been warning about for some time.
Olivier Blanchard, director of the research department at the IMF, warned on Tuesday that there is an “uneasy calm” over the debt crisis and “one has the feeling that at any moment things could well get very bad again.” Are we at the start of one such moment?
Bond markets were surprisingly calm on Wednesday, which suggests that nervousness might be misplaced. The yield on Italy’s 10-year government bond was unchanged, at 5.454 per cent. The yield on Spain’s 10-year government bond actually fell slightly, to 5.761 per cent, after touching 6 per cent earlier this week.
However, equities are fretting – though of course the stock market can be bothered about more than debt crises – with Germany’s DAX index down 1 per cent on Wednesday and Spain’s IBEX 35 index down 4 per cent.
Meanwhile, there is growing concern about Spain’s rising loan delinquencies, which have risen above 8 per cent of all loans in that country, up from 5 per cent at the depths of the 2008-2009 financial crisis. As the blog Sober Look pointed out, corporate loan delinquencies have been dominating overall delinquencies, as companies find it harder to get the necessary financing from Spanish or foreign banks.