European  

Investors ‘complacent’ on Europe

Economists have warned that investors may be getting complacent about the underlying problems in the eurozone, as markets rise on improving economic growth data.

Encouraging GDP estimates from Spain and France and purchasing managers’ index (PMI) data has led to expectations that the single currency area will soon move out of a recession.

Equity markets have risen substantially in the past year, while government bond yields in peripheral European countries have fallen significantly.

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However, Joshua McCallum, senior research analyst at UBS Global Asset Management, said investors were getting complacent about the risks in the eurozone – and especially the fact that Greece is still likely to default.

He said while the recent data may make it look like the eurozone has made it through the worst of the problems, it is still “deep in a hole”.

“We are used to the possibility that Greece could default, and if you combine that with central bank support, people are just moving on,” he said.

“But at some point there is going to have to be official involvement of some sort in Greece, and that could be a form of default.”

Mr McCallum warned there was no way that anyone would discuss the prospect of a Greek default before the German election on September 22, and he said the eurozone problems could resurface after the polls.

“After the German election, of course, we could easily see more volatility in action and yields could move in the run-up to the elections in anticipation,” he said.

Azad Zangana, chief European economist at Schroders, agreed that investors could see a rise in bond yields through August in the run-up to the election, because “some investors are concerned about more pressure being applied to Greece following the German election”.

Mr Zangana said he was worried that the more radical Greek political parties were gaining more support, which could ultimately challenge the present ruling coalition which is in step with demands from the EU.

The prospect of a collapse in the government was heightened recently when one of the junior coalition parties quit due to the restrictions being put on the state television network by the government.

Mr Zangana claimed European government bonds were now starting to look a little expensive given the risks involved, but dismissed any concerns about a bubble in the market, saying they were largely being bought by domestic investors.

However, Commerzbank economist Peter Dixon said the influence of the German election was being “massively overplayed” because most of the German political establishment shared the desire to help Greece, not force it out of the eurozone.

He said that while Greece had unsustainably high debt levels the problems should be “a lot easier to manage if the eurozone economies are showing a bit of growth”.