Why Spain's financial future is rosier than Italy's

Spain's fiscal prospects are brighter than Italy's, says Capital Economics' European economist Ben May. Although Italy's budget deficit is a fair amount better than Spain's, and the latter still faces some tough economic challenges, Spanish public finances are, in other respects, in something of a "healthier position".

The medium-term outlook for the public finances remains "pretty dire", says May, who would "not be surprised if Spanish government bond yields fell further below those of Italy in the coming months".

Spanish ten-year government bond yields have tended to be above Italy's, and Capital Economics expects Spain to outperform Italy when it comes to economics data. A flash estimate of Italian GDP, due out on Thursday, will, says the research consultancy, reveal that the economy shrank again in the last quarter. Spain, on the other hand, came out of recession in the third quarter and, although unemployment in the country remains "sky high", there are "signs that the worst of the labour market slump is now over". In contrast, Italian unemployment went up 12.5 per cent in September - the highest rate since at least the early 1990s.

May goes on to point out that Italy has not moved as quickly to implement the structural reforms needed to "boost competitiveness and raise the economy's long-run potential growth rate". And ongoing political tensions do little to imbue a belief that the pace of reform will pick up, either.

The European Central Bank's Outright Monetary Transactions (OMT) (the bank's bond-buying programme) should stop both countries' bond yields from "surging back" to where they were a year or so ago, but it would come as no surprise, adds May, to see both, but in particular Italian yields, creeping higher over the next few months.