From Special Report: Global Opportunities - May 2012
Prognosis for ailing Greek patient does not look good
What next for Europe if Greece exits the eurozone?
The electorates of powerful but stalling France and crucial peripheral weakling Greece have stated their unwillingness to grin and bear the acrid austerity remedy.
“The eurozone’s weakest link just got weaker,” says Tristan Cooper, sovereign debt analyst at Fidelity Worldwide Investment. He and many other experts say a Greek exit from the single currency is “firmly on the cards, although the probability and timing of such an event is uncertain”.
Spain’s struggles cannot be ignored, adds Mouhammed Choukeir, Kleinwort Benson’s chief investment officer (CIO), who warns downgrades and defaults are “inevitable”. The ailing Spanish economy continues to struggle and is the ‘elephant in the room’, he maintains, with a private sector drowning in debt and banks riddled with bad loans.
Kleinwort Benson warns others are likely to follow, “most worryingly France”.
But victory in the French presidential elections for socialist François Hollande, while it has cleaved apart the powerful ‘Merkozy’ alliance with Germany that has dominated Europe for the past few years, is not necessarily the disaster some doomsayers might predict. Germany, which itself suffers an increasingly dissatisfied populace ahead of elections in 2013, may be forced to stomach this turnaround as otherwise it risks being left as a outsider, although a powerful one.
What is clear is that Mr Hollande needs to very carefully balance his pro-growth pledges with what is not the most enthusiastic of debt markets. Andrew Morris, managing director of Rowan Dartington’s Signature discretionary management arm, predicts the new government will await the planned review of public finances in the summer “before facing and having to explain the economic reality to those who voted for him. In the meantime a softening of austerity measures in Europe would help him to offset any unpleasant surprises for the French population.”
The new French leader’s pro-growth plans, which incorporate the goal of renegotiating the fiscal compact, are likely to lead to some unstable markets in the short term, however. Mr Morris notes that, while a number of leading European figures have increasingly softened their austerity-only stance, “it is still not clear what form a pro-growth agenda would take”.
“There is increasing speculation that the European Investment Bank (EIB) may be given a prominent role in an infrastructure based investment program. Nevertheless, further debt-fuelled growth is by no means without risks because if it does not spark a sustainable recovery then the result will simply be more debt.”
Pressure on the ECB to act will build, adds Mr Cooper, “but its options are limited” as direct support for governments is banned by EU treaty and its latest actions have already satisfied banks’ short-term funding needs. He says the new president will “tilt the broad direction of policy in favour of growth” rather than to take it on a completely new course.
The Greek elections have sparked yet more uncertainty for the current sick man of Europe. If no government is formed through a coalition this month, then a further election will be held in the summer that may effectively act as a ‘referendum’ on remaining in the euro.
Derry Pickford, macro analyst at Ashburton, says “the chance of a second Greek default and the collapse of the troika programme are rising. One possible result of this could be a Greek exit from EMU”.
With national finances remaining in a parlous state and some analysts mooting the possibility the country’s funds could even disappear by the end of the summer, Ryan Hughes, senior fund manager at Skandia Investment Group, sees no happy ending for the Greek tragedy.
“With the pro-bailout parties failing to agree a coalition, it falls to the anti-bailout parties to try and form some sort of government. While this significantly increases the chances of Greece leaving the euro, this looks premature, with many Greeks still believing that a future out of the euro is more painful than remaining in it.”
The only way forward would seem to be a significant watering down of the troika program and further fiscal assistance from the European Financial Stability Facility. More than two thirds of Greeks have now refused the scale of cuts demanded by the hitherto unforgiving troika.
Mr Cooper of Fidelity suggests the critical upcoming troika review may be postponed if further elections are to be held. “However the political constellation in Greece develops, any government that is formed is likely to be fragile and prone to collapse. Digging Greece out of its economic hole seems an impossible task.”
An optimistic conclusion perhaps comes from JPMorgan Asset Management’s global fixed income CIO Nick Gartside, who emphasises that most of what may happen is already well built into prices, so the only way could be up.
“Yes, domestic economies look dreadful and yes, the political situation is tense, but both of these are ‘knowns’. Perhaps the risk, with initiatives like the Spanish bad bank plan or the EIB infrastructure plan, is that the tone in Europe improves?”
Oliver Haill is a freelance journalist
More in this report
- Still in Europe for the long haul
- US a winner in sentiment stakes
- Companies that the managers favour
- Broadly positive about emerging markets
- Why the smart money could still be in Asia
- The risks to Asia remain
- Unearthing the roots of recovery
- US finally on the road to recovery
- Aiming to grow capital in companies of different sizes
- Growth will make a return next year
- Mixed fortunes for Asia as Europe struggles on
- US growth prospects continue to improve
- Chances still abound to bag UK plays
- Questions of balance in the UK economy