For the first time since the beginning of the crisis, the Spanish government faces lower borrowing costs that the U.S. As the following chart shows, the yield of a Spanish five-year government bond is just below that of the U.S. equivalent bond.
- Spain is expected to grow around one percent this year, significantly below the 2.1 growth rate expected for the U.S. (IMF, World Economic Outlook, April 2014).
- Moreover, in Spain, more than one quarter of its active population is currently unemployed.
- To add to the confusion, Spain’s credit rating is Baa2 (Moody’s), eight notches below the top Aaa grade awarded to the U.S.
How is this possible? There are several explanations for this: First, this data seems to indicate that the panic is over. Investors feel more confident about the recovery of Spain and the fear of its potential default has diminished significantly.
Second, Spain faces a period of low inflation (and some argue, even deflation) ahead. Since inflation is less likely to wear down the value of monetary payments, investors are more willing to accept lower yields.
But, probably, the main reason behind all this is the fact that investors seem to be increasingly convinced that Mario Draghi, the head of the ECB, is about to start considering the possibility of quantitative easing, and to allow for some version of bond-buying in the E.U.