Despite multiple bailouts and austerity measures, debt managers remain pessimistic about the eurozone, as David Walker reports
In the year since eurozone finance ministers agreed the first sovereign bailout – an initial €30bn ($44bn) for Greece – bond managers have correctly predicted which other countries would need help.
Eurozone governments and the International Monetary Fund are expected to have provided an eye-watering €275bn further aid, once packages agreed for Ireland and Portugal are financed. On top of this comes capital they have had to commit for into a separate rescue fund.
Portfolio managers disagree on whether Spain will follow Greece, Ireland and Portugal. But they note Madrid will have to boost at least three-fold what it already committed to recapitalise banks.
Even after multiple official ratings cuts, debt markets remain pessimistic about all four countries, and managers say the drama has forced a re-evaluation of how to analyse names and invest in sovereign markets.
Henning Gebhardt, head of European equities at DWS Investments said: “Europe’s economy is not uniform, some parts are very healthy, others experiencing trouble, it is a totally diverse story in Europe country by country.”
Pain ahead
Gebhardt said Spain, Greece and Ireland all face structural issues and need to “clean up part of their economy”. He drew similarities with the span of rebuilding in Germany, which lasted over five years from the late 1990s.
Speaking before Portugal’s package was finalised, Chris Bullock, manager of Henderson Global Investors’ Horizon European Corporate Bond warned Brussels has given the trio “a bailout package, but not a rescue”, and managers concur restructuring appears inevitable, with painful haircuts for bondholders.
By mid-April Berlin was reportedly drafting plans to restructure Greece’s debt if Athens’ economic reforms failed to save the country – leading the spread between 10-year Greek and German debt to hit a record 1000bps.
Bullock said rates imply Irish and Portuguese debt is like ‘single-B’ rated paper, while Greece trades as CCC.
Joshua Feinman, Global Chief Economist at DB Advisors, said debt restructuring is more likely from 2013 onwards, “but we doubt there will be a break-up of the monetary union because there has been so much political capital expended on creating it”.
Of more immediate concern, said Henderson’s Bullock, is whether European voters will use forthcoming elections to vent growing sentiment against the support packages and their authors.
Additionally, Portugal’s next government could face a hostile public over its bailout.
One silver lining is the fact the bond market showed little contagion fear for Spain and Italy, barely moving spreads on their sovereign debt when Portugal first went begging in Brussels.
Tanguy Le Saout, Pioneer Investments’ head of investment grade fixed income, said this was simply because “investors have become accustomed to this crisis and can discern between true ‘basket cases’, and those countries with prospects of solving their fiscal problems.
