The following commentary comes from an independent investor or market observer as part of TheStreet's guest contributor program, which is separate from the company's news coverage.By Marc Chandler NEW YORK ( BBH FX Strategy) -- The more Spanish officials talk about the budget, the less credible it seems. The 10-year yield fell 11 basis points on Friday when the budget was first presented before the weekend. Now as more detail emerges as it goes to parliament, 10-year yields are rising.
The EU fought a rearguard action and found what it appears to think is a face-saving compromise of 5.3%, which in effect accepts Spain's fait accompli. And today, The Wall Street Journal quotes the finance minister saying that the government is concerned that too much austerity will exacerbate the economic downturn. One cannot help but to have sympathy for Spain's plight. There are multiple questions -- and answers -- about the country's future. If the question is whether Spain will achieve its new 5.3% deficit target based on current plans, the answer is that it's unlikely. If the question is whether Spanish officials are committed to the kind of fiscal austerity that is entailed in the freshly signed fiscal compact, the answer is that it's doubtful. If the question is whether the social strains and hardship will increase, the answer is most definitely yes.
Unlike Spain's Rajoy, Italian Prime Minister Mario Monti had a honeymoon, but it is over. There has been increasing talk that Monti may not last until the term ends in May 2013. His support rating is falling, and the municipal elections next month will be seen as a personal referendum There is an attempt to dilute some of his reforms, such as the property tax. In addition, since Monti unveiled his proposal for labor market reform, his support has waned and bond yields have risen. The 10-year yield was 4.83% on March 19, the day before his proposal. It is now near 5.15%. Although the labor reforms passed were approved by the cabinet, the fight in parliament will be ferocious. Even some who support the government will seek to dilute his reforms, which were already a compromise. The business lobby wants Monti to submit the labor reform bill as a vote of confidence to limit debate and the risk of dilution. However, Monti chose to go the draft law route, rather than decree, which would have limited debate and been implemented immediately, suggesting a sensitivity to such a divisive issue. The Spanish 10-year premium over Italy peaked near 41 basis points on the day Monti unveiled his labor reforms. The spread stands near 28 basis points now. On balance, we suspect the downside risks for Spain are greater than those for Italy. That's because Spain's bubble has not completely deflated, and housing and land prices have yet to see a bottom. That said, the fall of Monti or his labor reforms could produce a dramatic swing in market sentiment.