As I discussed in an article on this same paper last November, Ireland exited the EU/IMF bailout programme in December 2013. In this article we briefly report on the other four countries which most consider as the triggers to the eurozone crisis in 2010.
Starting with Spain, you may recall that Spain’s problems emanated from a real estate bust which threatened to bring down the country’s banking system. Spain agreed a rescue package in June 2012. Since then, reform efforts seem to be bearing fruit. Exports have showed an impressive turnaround; economic indicators suggest that economic growth could be trending around two per cent halfway through the current year, partly thanks to net exports.
However, government debt now stands at 93 per cent and may rise higher. Non-performing loans within the banking sector account for ca. 20 per cent of GDP. Unemployment rates, although improving, are still high with an overall rate of 26.4 per cent, 54.3 per cent among the under-25s.
In the bond markets, given Spain’s current borrowing rates, confidence in the Spanish sovereign seems to be improving. At 3.75 per cent, yields on 10-year Spanish government bonds are at their lowest levels since 2006. Compare this to the Irish 10-year bond at a yield of 3.32 per cent; and although yielding 2.1 per cent more than the German bund, the credit spread to the latter (the premium investors demand to hold Spanish bonds versus bunds) is improving as well.
Portugal is confident it can follow in the footsteps of Ireland
Next Portugal. For Spain’s Iberian neighbour, the crisis evolved due to the nation’s large public debt levels. Investors concerned that the country might fail to reduce its budget deficit and debt-to-GDP ratios sold their Portuguese bonds, sending yields up to seven per cent. At this unsustainable rate, Portugal had no choice but to request a bailout. Portuguese debt as a percentage of GDP still stands at a massive 128 per cent. However, the country has shown major fiscal and external adjustments; this positive trend is set to continue. The latest two GDP growth figures both showed modest quarter-on-quarter growth, 1.1 per cent in Q2 2013 and 0.2 per cent in Q3 2013. The country’s export ratio is one of the lowest in Europe – however this is on the rise.
More boldly, encouraged by positive investor sentiment with respect to the eurozone crisis, Portugal is confident it can follow in the footsteps of Ireland in being the next European country to exit the bailout program this summer. Government bond yields are still north of five per cent (compare this with bailout loan rates of 3.2 per cent). One major challenge for the sovereign, however, is to convince the bond markets to rollover a large amount of public debt maturing over the next few years.
Similar to a first-born child, Greece was a testing ground for the ECB/EU austerity programme. As you may recall, Greece’s problem was that of living beyond its means. Successive governments were too generous and public spending soared. Their means of income, however, was being hit by widespread tax evasion. In the years surrounding the country’s joining the euro, these same governments concealed substantial amount of the borrowing so as to meet the Maastricht treaty criteria. When this came to light, Greece could not pay up.
Given the harsh adjustment programme, it is no wonder that fiscal and structural adjustments are starting to bear some fruit. Labour costs have come down (percentage-wise, the Greek public sector is one of the largest employers on a European scale), export levels have increased and unemployment levels have fallen – albeit slightly.
Notwithstanding these changes, and the debt restructuring of 2012, debt-to-GDP still stands at a colossal 172 per cent. Greece is ahead of Spain and Portugal in terms of fiscal milestones and adjustments, but the country is nowhere close to being out of the woods yet.
Politically the country remains fragile, and a win for the euro-sceptic Syriza party in the event of snap elections could still lead to a Greek exit.
Lastly, Italy has been running a debt-to-GDP ratio in excess of 100 per cent since the early 1990s. When the eurozone crisis hit the markets, Italy’s then ratio (at 120 per cent) spooked investors, and set yields on Italian debt spiralling.
Domestic demand is low, and fiscal progress was somewhat halted last year due to the political turmoil in the country. Growth is positive and trending upwards, but further structural reforms can set Italy to economic recovery. Politics could still leave a stamp on the country’s economic situation should we have early elections.
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This article is the objective and independent opinion of the author. The information contained in the article is based on public information.
Curmi and Partners Ltd is a member of the Malta Stock Exchange, and is licensed by the MFSA to conduct investment services business.
Vincent Micallef is an executive director at Curmi and Partners Ltd.