Posts tagged ‘Ireland’

Greek Drama

There has been a lot of talk lately about restructuring Greek sovereign debt. Greece failed to meet its deficit reduction target for 2010; its debt on a Maastricht basis stands at 143% of GDP; its austerity programme saw the national economy shrink by more than 6% over the course of 2010; unemployment has risen to 15%. The country’s credit ratings are low and still sinking. Most alarmingly, Greek bonds have sold off to the point where two year yields have reached 24% – 10% higher than where they were a month ago. Some kind of sovereign default must be round the corner.

And yet … Greece’s underlying problems would not be solved by debt restructuring – problems it has already begun to address. Yes, a budget deficit of 10.5% is abysmal, but that’s down by almost 5% on the year: a fiscal consolidation not even close to being matched by any other country in Europe. The Greek government has also embraced a programme of privatisation and land sales to bring down its debt burden. All this is being accomplished in the teeth of fierce opposition from trades unions and large swathes of the public.

Beyond Greece too, what would a restructuring accomplish? Nobody knows for certain what the effect would be on the balance sheet of the financial system, including the ECB, and on Greece’s existing sovereign creditors, but it would be far from benign. And once the precedent of a restructuring was set, surely Ireland would be next in line to be pushed over the cliff (2010 deficit: 32.4% of GDP). Perhaps Portugal might follow.

At that point, the harbingers of Euro-doom could be proved right: we might witness the collapse of the single currency zone. The global fallout from that would likely make Lehman Bros look like a picnic. Which is why – to take one example – China has been piling into European investments, including government bonds. The world does not want another crisis, and a sovereign collapse in the eurozone could be just the catalyst to make it happen.

These remain uncertain times. The recent election in Finland serves as a reminder of the unpopularity of bailing out bankrupt states. And Greece has serious problems.

We should be careful, however, not to write off the possibility that Greece, and the other countries in crisis, find time and support enough to muddle through without resorting to default. It is also possible to envisage a “minor” restructuring of Greece’s debt – such as an extension of maturities and / or capitalisation of interest for a few years, arranged so as to have a neutral effect on the value of the instruments concerned – that could be helpful to the Greeks without sparking serious contagion (though the risks would be high).

In other words, the bears may have their day again soon: but on the other hand, Greek debt could present the bond market opportunity of the decade.

28/04/2011 at 3:36 pm

Thrilling Budget Showdown

No, not the one between Mr Osborne and Mr Balls on Wednesday – the one between Portuguese prime minister Jose Socrates and the country’s opposition parties the same day. Portugal’s government saw its latest package of austerity measures defeated, Socrates resigned, the country is heading for an election and (so the consensus believes) a Greco-Irish bailout courtesy of the EU / IMF.

The consensus view finds support in recent bond market movements – specifically in the widening of the spread of Portuguese government debt over that of Germany. (Similar moves preceded the Irish bailout last November.) In fact, ten year Portuguese paper yields 4.3% more than Germany’s at time of writing – this remains well short of Greece and Ireland, at +9.1% and +6.4%, but well clear of Spain and Italy too (+1.9% and +1.5%).

Furthermore, Mr Socrates’ likely successor as Portugese PM, Pedro Passos Coelho, has been a bit cagey about his commitment to fiscal discipline and the avoidance of bailouts.

Before we treat the bailout as a foregone conclusion, however, let’s look at the numbers.

Portugal’s budget deficit on a Maastricht basis peaked in calendar ’09 at 9.3% – bigger than the eurozone average but much lower than equivalent figures for Greece, Ireland and Spain. The deficit for 2010 is estimated at 7%, and on the proposed measures was targeted to reach 4.6% this year. In the Greek and Irish cases, a large part of the problem was that deficits into 2010 were continuing to widen.

Taking a thoroughly non-random example to compare: the UK’s 2009 fiscal deficit on the same basis came in at 11.4%, is estimated at 9.8% for last year and forecast to come in at 7.9% in 2011.

Now Portugal has other problems. Its growth rate for the last ten years averaged a miserly 0.7% p.a., and unemployment, though stable, is rather high for comfort at some 11%. But it is clearly in a stronger fiscal position than the countries which have already been bailed out.

One view of Portugal’s vote this week is that it was about politics rather than economics. That Mr Coelho and his supporters are happy to continue on the path of deficit reduction – albeit by different means – but that they also want to overhaul a sclerotic economy viewed as increasingly corrupt. They must also understand that a bailout would come with austerity measures attached that would be harsher than those they have just voted down.

Ultimately, as one senior European politician put it, “Portugal won’t be left alone by the other Europeans.” We have already noted that such an attitude augurs well for the euro’s long term survival. But evidence that the eurozone’s less responsible borrowers are capable of getting their houses in order independently would bode even better.

25/03/2011 at 1:49 pm

The Year In View

As this will be the last comment to be posted for 2010, it seems the appropriate place for some reflections on the year (almost) gone by.

Since this blog began in July, one consistent view has been that while the world economy would continue to recover, it would do so patchily. Equity markets agreed. At present, the S&P 500 has risen by 11.5% year to date; the Nikkei 225 is down 3.1%. In Europe, the stronger countries turned in some of the best equity market performance in the world, with Germany’s DAX up 18.4% and Sweden’s OMX higher by 21.6%. At the other end of the spectrum, Ireland’s ISEQ fell by 4% and the Athens Stock Exchange General Index stands a staggering 33.7% below where it started the year. Our own FTSE 100 index is in the middle, having risen 9.1%.

Despite the recent sell-off, bond markets – which reached crazy levels earlier in the year – have generally turned in a strong performance over 2010 as a whole. Ten year US, German and UK yields have fallen by 40-50 basis points (0.4-0.5%) year to date, implying price gains of around 3-4%. Unsurprisingly, the exceptions were the more distressed European government bond markets, with ten year Irish bond yields 350bp higher and the yield on ten year Greek paper up by almost 600bp.

Commodities have enjoyed a strong year overall, with the S&P GSCI total return index up some 6%. Behind the headline number, the near Brent Crude future has risen 18% year to date, a figure matched by the Bloomberg Base Metal index. Precious metals continued their staggering run into precarious territory, with gold 26% higher and silver up an astonishing 73%. One of the few fallers was a significant one for the index, however: the NYMEX natural gas future is down 26% on the year.

Finally, in the world of currencies, the big loser was the euro, down over 9% on a trade weighted basis year to date. The major gainers were the safe havens of the yen (up 13.4%) and the Swiss franc (up 12.8%), and the Australian dollar got an 8% boost from the commodity boom. Both sterling and the US dollar are broadly flat.

There are a number of observations that could be made on all of this, and even some hints to be drawn about the future. For now, however, we will limit ourselves to noting the disparity of returns between and within asset classes, underlining the portfolio contribution to be made from decision making at this level. And as to the future, may we wish you a merry Christmas, and a happy and prosperous new year.

20/12/2010 at 2:52 pm

Mixed Picture

It’s been another interesting week in these most interesting of times. The Fed’s decision to purchase another $600bn worth of US bonds did not come as a surprise, but it moved markets nonetheless. Equities did best, though bonds also performed well: after all, it is the bond market that is directly affected by the QE fairy dust. The big loser was the dollar, though as its weakness has been underpinning US export growth of 15-20% p.a. of late against a backdrop of near-zero inflation it seems unlikely that this will trouble American policymakers overmuch.

Perhaps a little less high profile were Angela Merkel’s renewed efforts to secure a debt restructuring for the peripheral eurozone countries and so reduce the burden of bailing them out that has fallen on German taxpayers. But her concern should remind us that the developed world continues to enjoy decidedly mixed fortunes at present.

For there are bonds and bonds, and while US Treasuries and German Bunds have risen over the last couple of weeks on the QE story, not every country’s debt has followed suit.

The yield of 10 year US and German bonds has fallen by 0.08% since two weeks ago. 10 year Greek bonds, however, yield almost 2% more, and 10 year Irish bonds about 1.1% more, which has pushed their spread over German paper to a new record (5.3%). Similarly, 10 year Spanish government bonds have risen 0.4% to a spread of more than 2% over Germany, and Portuguese bonds about 1% to a spread of 4.2%.

This compares to unchanged yields both for the safe eurozone countries such as France and the eurozone’s seemingly safe (but lower rated) eastern neighbours, such as Russia and Poland.

Nobody serious believes that financial markets are perfectly efficient any more. But investors ignore messages like these price movements at their peril. It was only at the end of June – a mere four months ago – that equity markets found themselves nursing significant quarterly losses, in large part due to the threatened sovereign debt collapse in Greece. Despite the fact that the credit ratings of countries such as Ireland and Spain remain relatively high, the bond market is telling us on its fringes that the PIGS could well have another sting in their tail.

05/11/2010 at 10:46 am 2 comments


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