Data for the periphery countries remain strong and Spain, Ireland, Portugal and Greece still have potential to surprise more, as the hard negative shock has resulted in very high pent-up demand. In the near term we expect domestic demand to improve.
The ECB's TLTRO has the potential to support credit growth in the periphery. This follows as the benchmark, which determines the potential take-up in the second stage of the TLTROs, is set such that negative net lenders can continue to deleverage but if they do it at a slower pace compared to the benchmark period, they are eligible for the TLTROs.
Periphery spreads have tightened further and in particular the short end is going lower as the effect of ECB's negative deposit rate is driving the hunt for yield. 2Y Portugal is now back at the level from before the concerns regarding Banco Espirito Santo hit the market. In the 10Y Portuguese yields have not reversed the latest increase, although they have started to trend downwards again. The 10Y Italy, Spain and Ireland are all trading with yields around all-time lows.
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