In 2012, at the peak of the eurozone crisis, the prospect of a national election in Spain would have sent shivers down investors’ spines – especially if it had threatened to put an end to more than three decades of stable government and increase the anti-austerity parties’ power. Political instability would have raised the prospect of further economic turmoil, conflict with potential northern creditors, and even national bankruptcy as investors ditched the country’s sovereign debt, raising long-term interest rates sharply.
But in the run-up to this Sunday’s vote, Spain’s ten-year bond yields have hovered around 1.7%, far below the 7% seen in the summer of 2012 – even though “the formation of a stable government [could be] fiendishly difficult”, as the FT’s Tobias Buck notes. Centre-right Prime Minister Mariano Rajoy is set to lose his majority, while the anti-austerity Podemos party “is certain to be a formidable presence in the new parliament”. A new liberal centrist party, Ciudadanos, could join with the conservatives, but only if Rajoy resigns.
Yet “the market is busy with other stuff”, as Elwin de Groot of Rabobank puts it. One reason is that Spain is deemed past the worst, now that it is growing at an annual pace of 3%. But the key difference is that there is a safety net preventing any spike in bond yields. “The European Central Bank is buying loads of public debt and has promised to do what it takes to keep the euro area together,” says Economist.com’s Free Exchange blog. In short, quantitative easing has calmed, though not resolved, the euro crisis.