Spain: The Eurozone’s new beating heart?A comparison between France and Spain

Macroeconomy: the Spanish economy has staged a spectacular recovery since the COVID crisis, to the point where it is now the engine of growth in the Eurozone. The French economy is doing fairly well, but economic momentum seems to be running out of steam, against the backdrop of an unprecedented political instability and a challenging budget context. Public finances : since the end of 2021, Spain’s public finance indicators have recovered much faster than in other EU Member States, particularly France. Debt sustainability : according to our simulations, the trajectory of Spain’s debt will be more tightly controlled over the medium term than France’s debt, with a median indicating a stability in France’s compared with a fall of 11 percentage points of GDP for Spain’s debt. Spreads : since 2017, of the four main Eurozone countries, Spain has seen its relative situation improve the most in terms of sovereign spreads against Germany. In contrast, the OAT spread has widened against Bund, in the context of a political crisis and budgetary risks. Rates strategy : appetite for Spanish sovereign bonds can be expected to hold up over the medium term and relative to the semi-core universe. However, (1) some weaknesses in Spain’s debt structure persist and (2) Spanish public finances are more sensitive in the event of an economic downturn. These last two points could limit the potential for a tightening of Spanish spreads, particularly against OAT. Although most indicators suggest that Spanish bonds are expensive, we still have a constructive view on the Bono curve for the medium term compared with the French or Italian curves. We expect the 10-year Bono-Bund to tighten to around 75bp by the end of 2025.