Despite multiple bailouts and austerity measures, debt managers remain pessimistic about the eurozone, as David Walker reports
No line can be drawn under the drama “until fiscal adjustment progammes in the periphery have been shown to work, and that’s going to take time,” said Darren Williams, Alliance Bernstein’s senior European economist.
In Spain Bullock wants “a big wash out of property pricing” or a wholesale recapitalisation that makes banks “bulletproof”, plus signs employment levels are moving in the right direction, to feel convinced the worst is past.
One manager noted Spain faces a high budget deficit requiring “huge fiscal adjustment while still trying to cope with fallout from a real estate/construction bubble and the resultant damage to its banks”.
Spain’s advantage, in Williams’ view, is its starting position in terms of public sector debt.
Pimco calculates Madrid must effect average fiscal consolidation by 9.4% this decade to stabilise public debt at 60% of GDP. The figures for Greece and Ireland are 13%.
Williams said: “There is a good chance [Spain’s] adjustment programme will work. The government should also be applauded for recognising the scale of the challenge early, in marked contrast to Portugal. Still, I’d be surprised if it was all plain sailing from here.”
Madrid already ordered a “drastic clean-up” of its savings banks, forcing the weak to raise Tier 1 core capital to 10% by September, noted Stefan Angele, head of investment management at Swiss & Global, “and if they fail to do so, the government will seize control through the state bailout fund”.
Trouble in the periphery
Still, it is not clear the EU/IMF cash has bought all the periphery enough time to grow its way from trouble.
DWS’s Gebhardt said the periphery has “very domestically orientated” economies, “and Spain’s was construction-related, so you do not necessarily have the option of exporting yourself out of problems”.
The IMF predicts sluggish eurozone GDP growth of about 1.7% annually to 2012 – only Japan fares worse.
Williams said: “Governments have done just about everything asked of them in terms of fiscal reforms, we now need to see if the adjustments work, and ultimately that will depend on economic growth. A negative supply shock [from oil] is likely to hit particularly hard in countries where there is already a big fiscal squeeze. Second, it is a threat to the global outlook and the export growth that all of these countries need.”
