What next for bailed out euro members?

The economic prospects for much of the eurozone remain dire, with the European Commission forecasting recessions this year for Greece, Portugal, Spain, Italy and the Netherlands.

Dominic Rossi, global chief investment officer for equities at Fidelity Worldwide Investment, says: “The Greek default has been priced into equity markets but what is far less clear is the implications for other nations, particularly Portugal, Spain and Italy.

“While we appreciate progress has been made, particularly in Italy, in pursuing policies that ultimately worked in emerging markets 15 years ago, this remains a multi-year workout during which they will remain vulnerable to external shocks.”

A recent example of poor economic data was the eurozone purchasing managers’ index (PMI), which dropped for the second consecutive month in March, to 48.7, lower than the 49.6 that economists had forecast. A level below 50 indicates a contraction.

Stefan Angele, head of investment management at Swiss & Global Asset Management, says: “The fall appears to have been broad-based across the region. France and even Germany – the stabilising forces in the European Union (EU) – disappointed with a manufacturing PMI of 48.1.

“Austerity measures do not come without costs. The economic contraction in Europe is putting pressure on politicians to implement structural reform measures and will accelerate economic divergence. As France and Germany have also started to weaken, the market will question global growth expectations.”

Financial news in the monetary bloc also remains bleak. In February, Moody’s downgraded the credit rating of six eurozone sovereigns, including Italy, Portugal and Spain.

Azad Zangana, European economist at Schroders, explains: “Many will remember that European leaders decided not to increase the actual amount of money in the European Financial Stability Facility back in October, but instead opted to try to leverage up the funds that had remained. Since then, the plan has fallen flat as outsiders, like China, have declined to pay into the fund, while the scheme that was designed to insure against losses was deemed unattractive.”

Problems with Portugal

Following the recent massive restructuring of Greek debt, commentators are wondering whether Portugal in particular might be next.

Neil Dwane, chief investment officer for Europe at Allianz Global Investors, observes: “Clearly what we have seen, particularly dramatically, is that the market has decided that Portugal, too, is bust. Portugal will become a clear issue. [At the start of the year] they had only just started to implement their austerity measures and the structural difficulties are becoming very clear.

“The nuisance for Portugal is that unfortunately, unlike Greece, all their debt is under English international law. This means that the Portuguese government cannot change the rules as the Greek government can through a bill in parliament. The Portuguese will have to negotiate international law, which gives them absolutely no preferential treatment. This could potentially be the reason why the ECB [European Central Bank] stopped buying Portuguese debt [in February], because if there is a restructuring everybody will take a haircut, not just the people who the ECB and the EU say will take a haircut.”