Europe's Infamy: Of Football and Indebted Nations
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In a list of "20 Most Indebted Nations" compiled by CNBC, other than 20th ranked USA and 18th ranked Australia, the rest of the list is populated by European nations. The ability of these nations to service their debts is crucial to Europe's recovery. Peripheral countries such as Greece, Portugal, Ireland, and maybe Spain are contributing to high tension within that area. Jimmy Koh, Head of Economic-Treasury Research shares his views... PT (Privilege Times): Will sovereign risks in 'Peripheral Eurozone' be contained? |
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A lot of interest has been focussed on Portugal lately. Portugal is a fundamentally weaker country that needs to boost its export rather urgently. The 'single currency' euro is now hampering export growth as it is deemed too high for such a 'peripheral country'. Likewise for Greece, these countries are finding it hard to gain competitive advantages, or any sort of advantage for that matter.
For now, the situation in Europe is not that bad. Auctions of Spanish and Portuguese debts over the past six months have been encouraging with yields for Portuguese debt coming down to about 7%. As long as interests can be garnered, a little breather is allowed to give the monetary authorities time to 'play out' some of their policies.
The worrisome part, I think, is when Spain gets hit with a potential default issue. Not only is the bailout amount going to be more substantial, banks in the UK and even in the US will also be affected due to their exposure to Spanish debts.
PT: What are the developments to look out for?
JK: Investors may want to take note of the following developments:
1. Eurozone bond auctions and how the market reacts to them. A key indicator is the yield spread between German bonds and the bonds of these periphery countries. The wider the spread, the more investors will demand for these debts as compared to German ones.
2. Policy meetings in Europe that decide on European Union Financial Stability (EFSF) Fund top-ups.
3. Political situation in Europe (state elections).
4. Downgrades by credit-rating agencies.
5. Results of stress test - Do European banks have the ability to deal with the debt crisis? This will probably be released in the second quarter of 2011.
PT: What is the main risk for the Eurozone?
JK: Banks exposed to debts of 'crisis nations' will be the hardest hit when the hammer starts to fall. This will be the direct effect of a melt-down in the Eurozone. The effect, though, will be contained within the Eurozone. It is the indirect effect that is of greater concern. The ripple will be felt in the UK, and even in the US. We think that this is unlikely to happen as the European Central Bank and yield officers will try to maintain financial stability.
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