Posts tagged ‘Ireland’
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.
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.
About a month ago, as the situation in Ireland continued to deteriorate, an informed commentator observed that the euro faced a battle for survival:
The first year of the Lisbon Treaty has been clearly marked by the crisis of the euro zone. It was not a period of vision, it was a period of survival; it’s not finished yet.
Who was this prescient figure? Some eurosceptic economist, perhaps? A scaremongering journalist?
Actually that quotation – and much besides – comes from a speech given in Brussels by “President of Europe” Herman Van Rompuy on 16 November, twelve days before EU leaders agreed the structure of Ireland’s famous bailout.
The Irish rescue package has been taken by some as evidence that the euro cannot survive. They worry that the single currency is serving too many masters with vastly different economic needs, and that it must collapse (perhaps by means of a German exit). Greece, Ireland … Portugal next? How long can this continue?
Now it is correct to note that the one-size-fits-all interest rate that goes along with single currency membership has caused problems over the years. In 2004-5 a rate of 2% was perfectly appropriate for Germany, for example, where inflation was contained at 1-2% and the economy was emerging but sluggishly from recession. In Ireland, however, where inflation was around a point higher and growth was sprinting along at 5%, such a rate was far too low.
Such imbalances, however, are inevitable in any economy. The US, for instance, comprises fifty states with vastly different growth and deficit positions. The more indebted of them face the prospect of default. For taxpayers at large, bailing out irresponsible borrowers will be no more palatable in America than it has proved on the Continent. Yet who is talking about Illinois abandoning the dollar?
Europe’s leaders have been acutely aware of the risks to their currency throughout the period of turmoil. To interpret their agreement of massive inter-state bailouts and emergency central bank support as a sign of structural weakness is to precisely misread the reality of the situation.
A year ago it was possible to ask, “what would Germany do if asked to bail out Greece? Will the euro survive a sovereign crisis?” Well, we have had two such crises now. The strong states have stood four-square behind the weaker ones, and four-square behind the euro.
Of course, sovereign defaults are terrifying. Market participants are rightly fearful of them, and market prices have moved in response. The euro is some 9% weaker on a trade weighted basis than it was at the start of the year, and the stock markets of Greece, Ireland, Portugal, Italy and Spain have all taken various degrees of battering.
But the French and German markets are up. In fact, the DAX has comfortably outperformed the All Share and the S&P 500.
Above all, the euro has survived – and the events of this year suggest that it is more and not less likely to continue to do so. As another European once observed: that which does not kill us, makes us stronger ..
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.