How does the risk premium affect the stock market?

<>The risk premium is one of the most important parameters to establish the evolution of the stock markets. Not surprisingly, investors scrutinize it every day to determine the decisions they will make to monetize their savings. Regardless, it will first be necessary to know what this important economic term really means. Well, the risk premium is, first of all, that the difference between interests that is requested from the debt issued by a country whose assets have greater risk compared to another risk-free.

Sea cual sea el caso, y para saber mejor su significado real, debes conocer que este tipo de prima es más conocida entre una buena parte de los inversores como el riesgo de un país. Debido a que en efecto, nada menos y nada más que mide los riesgos que puede atravesar una nación, sea la que sea. Y ha sido tan conocido por los eventos que has developed during the recent economic crisis, where every day the first thing that all financial intermediaries did was check what the risk premium was in Spain. Because to a large extent, and depending on its evolution, the stock market fell or rose with more or less intensity.

One of the keys to the risk premium is how its calculation is carried out, since it sometimes generates the odd problem to arrive at the percentage of this important economic data. Well, the Spanish risk premium, like that of any other country in our environment, calculated by subtracting the interest paid on the ten-year bonds The Spanish the interest paid on the German bonds in basis points. Because in effect, this German bond is the benchmark for establishing what your level is at all times. With a quite different impact, depending on its evolution.

Link to German debt

To establish the risk premium, it is very important to pay attention that not only does the weakness of the Spanish debt count, but also the strength of the German debt. In this performance, there is a lot of money passing out of hand and many winners and losers. Es uno de los temas que se destacarán en este post. Debido a que puede ayudarte a tomar posiciones en uno u otro activo financiero. Hasta el punto de que se puede ganar mucho dinero, pero por los mismos motivos, dejando excesivos euros en la carretera. Es un homenaje que hay que rendir a la prima de riesgo de un país, en esta circunstancia España.

Within this general scenario, the risk premium is listed on the financial markets as if it were a financial asset since it is, after all. With constant variations every day and that in the end determine the profitability of the investments. In this aspect, it represents a greater benefit for the investor in exchange for taking on a greater risk. As you will see, the word risk is always present in all their actions, as it is also logical to understand. And in a way it has been installed in the dictionary of a good part of the small and medium investors. One way or another, as is natural and understandable.

Risk premium: its levels

Today it will be absolutely necessary to know why the risk premium is at one level or another. Well, when it is said that the risk premium in Spain is at levels of 100 basis points, it means that there is no risk for the national economy. In other words, it is a truly favorable scenario for economic activity. With a very clear impact on the equity markets by favoring the stock markets maintain an uptrend as a result of this diagnosis. Where purchases are imposed with great clarity on sales. It is definitely news that is very well received by all economic intermediaries and investors could not be absent among them.

On the contrary, when the risk premium is out of control, for example above 400 basis points, it has a totally opposite meaning. In fact, it is the result of the fact that the risks are very high and great efforts must be made to change this trend or economic cycle. As you can understand, the financial markets do not take this fact very positively and they are frequent drops in bags, even with a special intensity. More or less it is a reflection of what happened in Spain at the beginning of the economic crisis, around 2012 and 2013, when its risk premium reached truly alarming levels.

Effects of a high risk premium

It is time to analyze its repercussions on the economy of a country and fundamentally when this level of contribution is very high. Because its implications are more relevant than you think from the beginning. Directly affecting the pocket of the consumers themselves. But it's time for you to check what its most important effects are and how you can notice them from now on.

• A considerable increase in the risk premium over our country is also reflected in the more immediate reality of the companies. Not surprisingly, it involves a higher cost of your financing. To the point that it can increase unemployment by not being able to take over a large part of its production.
• One of the most direct effects of this scenario is that interest increases considerably and as a result of this trend the state will have to reserve much more money to be able to pay them. In practice, this means that there will be less money for social spending, infrastructure, technology, and other types of services and benefits. It is not the best scenario, therefore, for the majority of citizens since the State will tend to an economic policy based mainly on savings.
• Of course, an increase in the risk premium is not good news for employment, far from it. Because in effect, according to calculations made by the banking sector, it is indicated that for every 100 basis points that the risk premium increases, about 160,000 jobs are created in Spain. Therefore, by highlighting a clear link between a high-risk premium and the employment generation in a country. As has happened in Spain in recent years, where this economic parameter has gone from 500 to less than 100 basis points in a few years, as is happening right now.

Less credits and more expensive

Nor can we forget another fact that has an important reflection in society and that derives from the need to finance themselves in the usual marketing channels, in this regard, banks must pay more money to finance y este hecho se transmite inmediatamente al Username. Esta realidad conlleva que el otorgamiento de líneas de crédito se está desacelerando y que las condiciones son mucho peores que hasta ahora. Dicho de otra forma, el client no tendrá más remedio que pagar intereses más altos para poder financiarse. Dicho de otra forma, ambas partes del procedimiento se verán de forma clara afectadas por esta evolución de la prima de riesgo.

On the other hand, it is also very relevant that consumption slows down with great intensity. There is less money in motion and as a result the main economic constants of a country are harmed. To levels that can be very dangerous for everyone. Namely, lower economic growth and more unemployment as some of the most important variables and that are noticed by a good part of the agents of the society. It is a very negative spiral that has no positive points, as we are indicating in this post.

Money seeks other markets

Nor can it be forgotten that when these scenarios originate, money changes hands. This simply means that investment flows try to find other financial markets that offer them greater security and peace of mind. As usual towards more stable squares, as by way of example the German or the North American. It is a reflection that money today has no country, but seeks its own profitability, above other technical considerations. And of course, in these scenarios it is not the best profitability they can find.

This is another motivation for large investors to move their money to other equity markets. With a selling pressure on the price of the shares given that the lack of buyers affects this special trend to occur and that is identified by small and medium investors. Because there is no doubt that purchases can be made with prices more adjusted to the new reality. Beyond the possible rallies that may occur in national financial markets, under one intensity or another. Not surprisingly, this is another added risk for investors.