The Italian government had taken measures which would lead to a reduction in the deficit below the reference value of 3%. The Spanish government had just embarked on a series of reforms re-dressing long-standing problems in the labour market and in the banking sector.
Despite this, the compensation that investors were asking for the risk to hold Spanish or Italian bonds was almost twice as large as one year before. 1  This resembled the environment described in the academic literature on second generation currency crises, see M. Obstfeld (1986), “Rational and self-fulfilling balance-of-payments crises“. American Economic Review 76 (1), pp. 72–81.