Eurozone predicament worsens in spite of latest plan to stem crisis


Jeremy Weltman
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Spain and Slovenia on the verge of a bailout; cohesiveness still at stake, according to Euromoney Country Risk Q3 2012 results.

The Euromoney country risk survey results indicate that eurozone risk is still a concern for economists. The single-currency area might be one of the relatively safer areas of the world, on average, but it has seen the largest score decline during the past two years of any region – a 10.6 points fall, larger than the Brics and Middle East. And in Q3 2012, the region has seen a further 0.6 point fall in its average score, to 67.6, with 11 of the 17 euro participants downgraded.

Greece – the region’s pariah – remains by far the riskiest eurozone country, at 115 in the global rankings. With continuing social unrest, and facing a sixth year of deep recession, the enormous austerity and structural reforms required by the country’s creditors keep the sovereign’s continued eurozone participation in the balance, undermining its risk profile.

Some of the eurozone countries have seen their scores improve since Q2 2012, not only Estonia and Finland – two of the more robust member states, with advantageous fiscal metrics, ranking 22 and six respectively – but also Portugal and Ireland.

For the latter two, it merely represents stabilization as bailout programmes progress. Both countries are still among the higher-risk sovereigns using the single currency, as they continue to cope with ailing banks, weak economies, and political and social problems accompanying the swingeing austerity measures contained in their bailout programmes.

The European Central Bank’s (ECB) outright monetary transactions programme – the purchasing of bonds to ease the borrowing costs of indebted sovereigns – has perhaps helped to bring some stability and restore confidence in the euro’s viability.

As Matthias Goethel, of Deutsche Postbank and one of ECR’s survey contributors, states: "We would prize liquidity and risk aversion, and this is what the ECB is trying to do. [The aim is to] find a new fundamental view on interest rates that will be considerably lower than the market price we have seen earlier this year."

It is a credible proposal to keep the currency together, he says, because "monetary transmissions will be possible again and it will also help consolidate the budgets and give some breathing space for the most affected countries".

Yet it has failed to eradicate the tide of negativity surrounding the region, as few believe this latest plan to inject confidence provides a cure-all, due to implementation delays, the conditions attached and a failure to resurrect growth, which remains the region’s Achilles heel.

These risks are borne out by a small rebound lately in long-term borrowing yields and credit default swap (CDS) spreads (measuring the cost of insuring against a default), and which are both still higher than two years ago for most of the at-risk eurozone members, despite interim volatility.

The prospect of bailouts for Slovenia and Spain is evident in their falling scores and rankings this year. They are not only the region’s biggest fallers in Q3 2012, but also the two sovereigns that have undergone the largest downward score shifts worldwide – amounting to 5.3 points and 4.0 points respectively.

Slovenia, plummeting 13 places in the global rankings this year (to 35), has seen all five of its economic sub-factors downgraded since Q2 2012. Its banking and fiscal problems are about to place a further drain on eurozone emergency funding, along with Cyprus, another member state with heightened risks.

Spain, the eurozone’s fourth-largest economy – behind Germany, France and Italy – is in a different ballpark. Its ECR score has fallen further this quarter, by 4.0, to 54.9, taking the borrower down 17 places in the rankings this year to 48.

Twelve of Spain’s 15 political, economic and structural risk indicators have been downgraded since Q2 2012. Its cost of borrowing over 10 years was fluctuating around the 6% mark at the end of September, compared with just over 5% for Italy – some 4.5 percentage points higher than the equivalent bund.

According to Roberto Cervelló-Royo, assistant professor at the Universidad Politécnica de Valencia, and one of ECR’s experts, multitude factors are combining to raise Spain’s risks again: "Uncertainty about the bailout/bank bailout and the intervention of the ECB in sovereign debt – ie whether to purchase or not – the budgets of governments and autonomous regions, the regional governments’ debt, the overall budget deficit goal, the austerity plans and tax policies, and the fact there is no economic growth, the unemployment rate [which is still growing], citizens’ dissatisfaction and Spanish politicians’ irresponsibility."

Yet, financial assistance does not appear to be the main sticking point for the indebted eurozone sovereigns. The problem is seemingly more a political one.

Jochen Mierau, assistant professor at the University of Groningen, and one of ECR’s survey contributors, states: "The bond problem, especially in Greece, in terms of the size of the EU budget, is very small. The Greek national debt is about 1% of total EU GDP, so if the EU wishes to bail out Greece, it can do so without the ECB. So what the market is truly looking at is for there to be a political solution to the problems in Greece and now maybe also in Spain and Italy."

"So long as the European politicians are not able to show to the outside world that they can solve the sovereign debt crisis by political means, everything else will be seen as a weak offer. Because, of course, the ECB can simply print money, that’s the easy way out. But the good thing would be if you would not have to rely on this easy way to solve your problems, but that you can come to a true political solution.

"The [resolution] programme lacks clear political uniformity in solving the European debt problems – in a sense it is always easier to throw good money after bad – but what we want is that the European institutions come up with plans for reform."