Spain's risk premium, the spread between Spain's and Germany's benchmark 10-year sovereign bond yields, picked up on Monday morning to 367 basis points following a very bearish week for Spanish equity markets.

The Spanish 10-year bond now has a yield of 5.37%, up from 5.2% at the close of last week. As pressure finds its way back into the peripheral European debt markets, Spain's equity benchmark index Ibex35 has added another 1.0% loss on Monday morning.

Following an optimistic start to 2013, the focus is returning to the country's problems as the international press picks up corruption scandals at the governing People's Party.

The resurging problems coincide with the lifting of a short-selling ban last week and LCH Clearnet's decision on Monday to lower margin requirements for Spanish bonds. The European clearing house lowered margins for France, Italy, and Spain's short and long-dated bonds.

Traders appear eager to take advantage of the new rules to increase their risks and bets against Spain.

Italian assets are also under pressure. However, Italy joins the ride on its own merits and not just out of fear over contagion. The Alpine country faces its own problems as upcoming presidential elections raise concerns that reforms implemented by Mario Monti will be reversed.

Italy's 10-year bond yield rises by 10 basis points to 4.42% and Italian equities are down an average of 0.50%.

In short, Spain and Italy seem set to drive the European crisis back into the spotlight.

JP

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