Ireland and Spain lead the way on a long road back for the eurozone periphery

By:
Jeremy Weltman
Published on:

Improved risk scores by Euromoney Country Risk indicate the worst might be over for the debt-distressed eurozone sovereigns, but caution is the buzzword, as many countries are grappling with huge debt burdens, and with question marks still surrounding Greece.

For the first time since the 2008 crisis, the eurozone bailout countries have enjoyed more or less a synchronized rebound in their risk scores, with experts taking part in Euromoney’s country risk finally beginning to take a more benign view of eurozone risk from a bond-market perspective.

Among the highest climbers through the global rankingssince December is Portugal, jumping 12 places to 52nd out of 186 nations surveyed. Italy, a six-place climber to 49th, and Spain, now at 47th – nine places higher compared with Q4 2013 – have also improved their standings.

All three countries fell into the third of ECR’s five risk categories before sequentially downgraded ratings actions from Fitch, Moody’s and Standard & Poor’s, delivering a B or C rating. They have all seen their economic risk indicators upgraded across the board, including perceptions about economic growth, unemployment and the government’s finances.

Leading the charge is Ireland. Having climbed five places to 38th, the Celtic Tiger is now less than five points and four places away from Malta and tier-two status.

It’s a remarkable turnaround for a country so badly affected by the banking crisis, which wrought such havoc on an economy caught up in an inflated property boom.

The question now is whether this improvement in ECR’s survey marks the beginnings of an uphill climb that will ultimately see those credit ratings improve.

Demand for eurozone debt has been exceptionally favourable in recent weeks with a raft of new issuance coming to market, but timing is a critical factor in matching supply to demand.

Much of the goodwill towards the eurozone periphery is coming off the back of a flight to safety with advanced country debt becoming perceptibly more attractive again, vis-à-vis emerging markets wobbling from US Fed bond-purchase tapering, and high fiscal and current-account deficits.

Austerity successes and a return to growth are improving the picture, with steadily rising business confidence indicators highlighting the trend – but huge challenges remain.

Many of the debt-distressed eurozone sovereigns have a long, uphill climb to regain the levels of safety prevailing before 2007/08. This is borne out by the latest fiscal snapshot from Eurostat this week showing large deficits and rising debt burdens in 2013.

At 7.2% of GDP, Ireland’s deficit has returned to the level prevailing in 2008, but with its debt also climbing to within a whisker of 124% of GDP. Portugal’s debt burden has reached 129%, Italy’s almost 133% and Spain’s, though comparably more favourable, is 94%.

Greece, lying in 118th place on ECR’s scoreboard, mired in ECR’s lowest category, saw the deficit rise to 12.7% of GDP last year – shovelling its debt back up to 175% of GDP.

With Belgium, Cyprus, France and the UK entering the picture, nine EU member states had debt burdens above 90% of GDP.

Constantin Gurdgiev, adjunct professor at Trinity College Dublin, provides a conservative assessment. "Growth prospects are improving, but all peripheral countries are still sustaining levels of real GDP well below pre-crisis levels and are nursing very high levels of unemployment," he says.

"Domestic investment remains anaemic and real economy deleveraging is ongoing."

Still, with Ireland exiting its bailout in December without ongoing multilateral support, Portugal hoping to follow suit over the coming months, and economies, such as Spain’s, now reviving, Q1 2014 might have marked a turning point in the eurozone crisis. ECR data is certainly pointing that way.

This article was originally published by ECR. To find out more, register for a free trial at Euromoney Country Risk.