The risk premium was one of the most repeated terms during the financial crisis of 2008 and the European debt crisis.
Although it has lost prominence in recent years, it reappears in moments of economic or political uncertainty because it remains one of the main indicators of market confidence in a country.
What is the risk premium?
The risk premium is the difference between the interest that a country pays to finance itself and the one paid by another considered safer.
In Europe, the reference country is Germany, as its public debt is considered the most reliable in the eurozone.
Therefore, when talking about the Spanish risk premium, it refers to the difference between the yield of the Spanish ten-year bond and the German bond with the same term.
How is it calculated?
The calculation is simple. The yield of the German ten-year bond is subtracted from that of the Spanish ten-year bond.
For example:
- Spanish bond: 3.40%
- German bond: 2.10%
The difference is 1.30 percentage points, that is, 130 basis points, which is the usual way to express the risk premium.
Why is it important?
The risk premium reflects the level of confidence that investors have in a country's ability to repay its debt.
If it increases, it means that markets demand a higher return to lend money to the State because they consider that there is a higher risk. If it decreases, it indicates that the perception of the country's solvency improves.
What happens if the risk premium rises?
An increase in the risk premium can have several consequences. The main one is that the State must pay more interest when it issues new public debt.
Over time, this higher financing cost can also affect the overall economy because it influences credit conditions and investor confidence.
What factors cause it to change?
The risk premium can vary for numerous reasons.
Among them, the following stand out:
- The economic situation of the country.
- The level of public debt.
- The political stability.
- The decisions of the European Central Bank (ECB).
- International or financial tensions.
Market expectations about economic growth or the evolution of interest rates also influence.
Does it directly affect families?
Not immediately. The risk premium does not directly determine how much a citizen pays for their mortgage or for a loan.
However, when it remains high for a long time, it can increase the financing costs for the State and generate a context of greater economic uncertainty that ends up affecting companies, consumers, and financial entities.
An indicator that remains under surveillance
Although today it no longer makes headlines as frequently as it did during the European debt crisis, the risk premium continues to be one of the main barometers of market confidence.
That is why, when episodes of political instability, financial tensions, or changes in the ECB's monetary policy occur, it is once again at the center of the economic debate.