Contagion risk in Europe is back on the agenda, not even a month after a debt swap that saw Greece sheltered from a messy default after a second liquidity-boosting operation from the European Central Bank. Among the euro zone periphery countries, Spain is creeping up again as the big, sick member of the area and a recent rise in Spanish bond yields is a sign that its illness is unlikely to be cured soon, analysts told CNBC.com on Thursday. Italian 10-year bond yields rose 7.9 basis points on the day on Thursday, to 5.08 percent but they were overtaken by Spanish 10-year bond yields, which were 5.49 percent, up 7.2 basis points on the day according to Reuters data. On Friday morning, Spanish 10-year bond yields were hovering around 5.47 percent while Italian bond yields were around 5.07 percent. “It’s the contagion risk,” Jeffrey Alldis, a trader at ACT Currency Partners in Zurich told CNBC.com. “It’s possible that other countries like Spain, Italy and Ireland want the same thing” as the deal Greece got to restructure its debt, Alldis added. “We’re seeing the expectation of volatility increasing which also tells us that uncertainty is rising,” he said. Spreads of credit default swaps – the cost of insuring against default – were 433.12 for Spain and 376.6 for Italy on Friday morning. After the European Central Bank’s second Long-Term Refinancing Operationon the last day of February, some analysts said that the European debt crisis was over as banks would use the money – lent to them at the bank’s record low rate of 1 percent for three years – to buy the sovereign debt of the stricken euro members.

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Headlines: Contagion Risk in Europe
Is Back and Spain Is Top Worry

2. Contagion risk in Europe is back on the agenda, not even
a month after a debt swap that saw Greece sheltered
from a messy default after a second liquidity-boosting
operation from the European Central Bank.
Among the euro zone periphery countries, Spain is
creeping up again as the big, sick member of the area
and a recent rise in Spanish bond yields is a sign that its
illness is unlikely to be cured soon, analysts told
CNBC.com on Thursday.

3. Italian 10-year bond yields rose 7.9 basis points on
the day on Thursday, to 5.08 percent but they were
overtaken by Spanish 10-year bond yields, which were
5.49 percent, up 7.2 basis points on the day according
to Reuters data.
On Friday morning, Spanish 10-year bond yields were
hovering around 5.47 percent while Italian bond yields
were around 5.07 percent.
“It’s the contagion risk,” Jeffrey Alldis, a trader at
ACT Currency Partners in Zurich told CNBC.com.
“It’s possible that other countries like Spain, Italy
and Ireland want the same thing” as the deal Greece
got to restructure its debt, Alldis added.
“We’re seeing the expectation of volatility increasing
which also tells us that uncertainty is rising,” he said.

4. Spreads of credit default swaps – the cost
of insuring against default – were 433.12 for
Spain and 376.6 for Italy on Friday morning.
After the European Central Bank’s
second Long-Term Refinancing Operationon
the last day of February, some analysts said
that the European debt crisis was over as
banks would use the money – lent to them at
the bank’s record low rate of 1 percent for
three years – to buy the sovereign debt of
the stricken euro members.

5. ‘Temporary Anesthetic’
For a while, it looked like the liquidity injection was
working.
“Since the second three-year LTRO at the end of
February there’s been a lot more stability in the euro
area banking system as a whole,” Stephen Gallo, head
of market analysis at Schneider Foreign
Exchange, told CNBC.com.
“A lot of the money that was lent by the ECB went into
areas such as Italian and Spanish debt,” he said.
Analysts at Capital Economics wrote in a market note
that the central bank’s latest liquidity operations
appear to have delayed “a looming disaster in the euro
zone banking sector.”

6. “But it would be wrong to think that they have solved the
region’s deeper fiscal and economic problems, or secured
the future of the single currency itself,” they added.
“The ECB has administered an effective, but
temporary, anesthetic. It is up to the region’s
governments to deliver the cure.”
Gallo said investors should look to two-year bond yields
to see what markets think of the periphery countries, as
for most of them the debt is massed towards the short
end of the maturity spectrum.
Yields on two-year government bonds were around 8 basis
points lower for Italy than for Spain, despite the fact
that before Prime Minister Mario Monti took over, Italy
was considered a country with more difficulties than
Spain and its debt was priced higher.

7. “If you look at the way short-term Italian yields
reacted to the LTRO, it looked like a lot of
investors and banks went for Italy,” Gallo said.
“Italy has better fiscal metrics than a country
like Spain, Portugal and obviously Greece… Italy
is essentially safe.”
“The story in Spain was a huge over-leveraging of
private assets. Spain is more vulnerable because
of the huge property bubble,” he added.

8. Boom Gone Bust
Spain’s construction boom during the golden years before
the credit crunch saw thousands of apartments being built
while the country imported workers from poorer European
Union members such as newly-accepted Romania and
Bulgaria to keep up with demand for workforce.
But as the crisis struck the housing market
crashed, leaving behind ghost towns and forcing Spain to
defy European Union principles by imposing restrictions on
the workers from new member countries as unemployment
soared to more than 22 percent.
An analyst told CNBC.com earlier this month that Spain
was suffering worse problems than Greece because of its
dire economic situation.

9. The country entered a dispute with the European Union
over cutting its budget deficit, as the EU wants it to
impose harsher austerity than the government is
comfortable with.
“The issue is that Spain is a bigger risk to the euro area
at the moment… the balance sheets of its banks are just
awful,” Gallo said.
The “huge bout of austerity” in Europe has people
wondering where growth will come from, adding to
insecurity about the euro zone, Rob Carnell, an analyst
with ING, told CNBC, adding that the LTRO is unlikely to
filter through into the real economy, just as the Federal
Reserve’s quantitative easing did not mean more lending
for businesses and individuals in the U.S.
“I wouldn’t have thought that you’re going to get a big
impact on the real economy,” Carnell said.

10. Data on European manufacturing seemed to
confirm the gloomy outlook, with the flash
composite euro zone PMI declining to 48.7 in
March against expectations of an improvement
to 49.7, with both manufacturing and services
contracting. A number of under 50 shows
contraction while anything above it signals an
expansion.
Strikes against austerity measures are
expected in Spain next Thursday, a day before
the government’s discussion of the budget.