Despite multiple bailouts and austerity measures, debt managers remain pessimistic about the eurozone, as David Walker reports
“Spanish authorities have at least started the process of restructuring, forcing mergers and are attempting to raise some private capital.
“We hope that the authorities will face up to the true capital deficit in the system; show an ability to raise some capital privately; and use [Spain’s] Fund for Orderly Bank Restructuring to adequately recapitalise those institutions that cannot generate capital privately. If they don’t address these issues in a pragmatic way, then the negativity will likely spread to the sovereign.”
Bullock said lack of spread-widening on Spain is hardly cause for celebration. “The surprise now would be if [supported countries] did not eventually restructure. It is up to them to convince markets they can grow out of their debt burdens, but given weak banking sectors, rising debt costs and high unemployment, it is hard to see in the longer term how they will avoid some form of restructuring.”
Andrew Bosomworth, executive vice president at Pimco, said the decoupling of Spanish bond yields from its neighbours’ is encouraging, but he added: “If uncertainty surrounding Greece, Ireland and Portugal persists, there is a danger it drags Spain and Italy into similar debt traps. Europe has neither the will nor the wallet to support all member states.”
However, for the coming two years at least, managers say the central bail-out mechanism holds enough money to tide problem-countries through funding requirements.
As that period nears an end, said Chris Iggo, Axa Investment Managers’ fixed income chief investment officer, official creditors will hold proportionately more debt than private investors so the question becomes: “If private creditors of existing debt are not going to take a hit, will official creditors representing Europe’s taxpayers?”
That’s unlikely – hence a haircut for bondholders that managers forecast will be between 50% and 60%.
Restructuring
Iggo said: “To most economists it looks very clear that debt should be restructured in some countries because they are essentially insolvent.”
Given all this, Bullock said Portugal’s rescue “most certainly does not draw a line under matters for the three countries receiving aid.
“The three have effectively been lent a large amount of money which they now need to service and, at some point, repay. But without any overall reduction in outstanding debt or the ability to competitively devalue, and facing stringent austerity packages, growing their way out of this situation looks highly unlikely.”
Pimco’s Bosomworth called for a “firewall” between solvent and insolvent states, and to “address the overhangs of the insolvent countries and banks via principal reduction”.
