Connect with us

Hi, what are you looking for?

World

Eurozone brushes with normal as investors return

-

The eurozone may be finally returning to some semblance of normality after years of debt crisis that brought fear to the world.

It's been two years since the now 18-member currency bloc was fighting for its life and investors are again knocking on the eurozone's door, buying up assets deemed dangerous only months ago.

The latest sign of this is on the bond markets, where the borrowing rates for countries that seemed on the verge of a precipice are back at levels last seen before the crisis.

"The risk associated with the eurozone has reduced significantly in the past few months," said Christian Parisot, an economist at Paris-based investment bank Credit Agricole CIB.

Spain, Italy, as well as bailed out Portugal and Ireland have seen their borrowing rates fall sharply.

By the end of the week, Spanish benchmark debt was trading at about 3.8 percent, a long way off the danger level of more than six percent hit in 2012. Italy was at 3.9 percent.

Mario Draghi  President of the European Central Bank  pictured during a press conference at ECB head...
Mario Draghi, President of the European Central Bank, pictured during a press conference at ECB headquarters in Frankfurt/Main, on January 9, 2014
Arne Dedert, DPA/AFP/File

Falling sovereign yields help to boost economies, and crucially lift the pressure on governments to impose yet more austerity measures on their people.

"There is a broad strong market sentiment which is getting ever more robust and resilient which is positive for the eurozone periphery," said Christian Schulz, senior economist at German private bank Berenberg.

Reassured, Ireland went to the markets on Tuesday and Portugal on Thursday, both meeting heavy demand for medium to long-term debt.

"PIIGS (sic) can fly," said analyst Holger Schmieding of Berenberg bank, using the acronym coined by cynics for Portugal, Ireland, Italy, Greece and Spain.

Spain's borrowing costs plunged, too, in an auction of five- and 15-year bonds.

A man passes by a government employment office in central Madrid  on January 3  2014
A man passes by a government employment office in central Madrid, on January 3, 2014
Gerard Julien, AFP/File

For Schmieding, the easing comes thanks to Mario Draghi, the head of the European Central Bank.

It was Draghi's outright vow to do whatever it took to save the euro that ended the "irrational panic that had swept the euro periphery and the region as a whole," Schmieding said.

But the analyst also hailed reforms in countries where the "pain" of austerity was "not in vain" despite recession and record-high unemployment.

"Sentiment among the reform countries at the eurozone periphery is rebounding at least as fast as it is for the region as a whole," the analyst said.

But rates in richer countries and those in the poorer ones are still far from the convergence brushed with a decade ago, when the euro was first introduced.

Germany and France today still enjoy borrowing rates far lower than partners to the south. Debt issued by super-safe Germany was trading at about 1.9 percent on Friday and France at 2.5 percent.

Protesters clash with anti riot-police during a demonstration to ask for affordable housing and agai...
Protesters clash with anti riot-police during a demonstration to ask for affordable housing and against government's austerity measures, in Rome, on October 31, 2013
Filippo Monteforte, AFP/File

Low rates mean low returns for investors, though.

"Investors have little hope of gains from Germany and France," Parisot said, with a chase for a better return pushing them to venture back to riskier countries.

But even though rates may be falling in the periphery, analysts caution that all is hardly solved in the eurozone.

"The convergence will continue, but slowly," said Cyril Regnant, a bond strategist at Natixis, adding that the "situation has improved, but not normalised."

Ireland, which left an EU-IMF bailout in December, and Portugal, which should do so in May, are well aware that dangers still lurk.

Their bond sales were limited to a group of pre-set investors, thereby limiting surprises.

"Their return to the markets, is a gradual one," Parisot said.

And the trading volumes involved are low, meaning that even a pinch of demand can sharply change the borrowing price.

Ronan Blanc, bond manager at Quilvest Gestion in Paris warned that the calm was deceiving.

"There's no talk of how countries will bring down debt in the long term," he said.

Italy carries a huge two trillion debt mountain and Spain's debt hit a new record of 93.4 percent of gross domestic product in the third quarter of last year

Debt of this proportion needs inflation, or years of vigorous growth to wind down, he said.

Or, as with Greece, it can be restructured in a write-off, but this radical solution would only restart the crisis fires.

ECB chief Draghi himself urged caution about this being the start of a lasting turnaround in the crisis.

"It is still premature to declare any victory," Draghi said, adding the recovery remains fragile.

The eurozone may be finally returning to some semblance of normality after years of debt crisis that brought fear to the world.

It’s been two years since the now 18-member currency bloc was fighting for its life and investors are again knocking on the eurozone’s door, buying up assets deemed dangerous only months ago.

The latest sign of this is on the bond markets, where the borrowing rates for countries that seemed on the verge of a precipice are back at levels last seen before the crisis.

“The risk associated with the eurozone has reduced significantly in the past few months,” said Christian Parisot, an economist at Paris-based investment bank Credit Agricole CIB.

Spain, Italy, as well as bailed out Portugal and Ireland have seen their borrowing rates fall sharply.

By the end of the week, Spanish benchmark debt was trading at about 3.8 percent, a long way off the danger level of more than six percent hit in 2012. Italy was at 3.9 percent.

Mario Draghi  President of the European Central Bank  pictured during a press conference at ECB head...

Mario Draghi, President of the European Central Bank, pictured during a press conference at ECB headquarters in Frankfurt/Main, on January 9, 2014
Arne Dedert, DPA/AFP/File

Falling sovereign yields help to boost economies, and crucially lift the pressure on governments to impose yet more austerity measures on their people.

“There is a broad strong market sentiment which is getting ever more robust and resilient which is positive for the eurozone periphery,” said Christian Schulz, senior economist at German private bank Berenberg.

Reassured, Ireland went to the markets on Tuesday and Portugal on Thursday, both meeting heavy demand for medium to long-term debt.

“PIIGS (sic) can fly,” said analyst Holger Schmieding of Berenberg bank, using the acronym coined by cynics for Portugal, Ireland, Italy, Greece and Spain.

Spain’s borrowing costs plunged, too, in an auction of five- and 15-year bonds.

A man passes by a government employment office in central Madrid  on January 3  2014

A man passes by a government employment office in central Madrid, on January 3, 2014
Gerard Julien, AFP/File

For Schmieding, the easing comes thanks to Mario Draghi, the head of the European Central Bank.

It was Draghi’s outright vow to do whatever it took to save the euro that ended the “irrational panic that had swept the euro periphery and the region as a whole,” Schmieding said.

But the analyst also hailed reforms in countries where the “pain” of austerity was “not in vain” despite recession and record-high unemployment.

“Sentiment among the reform countries at the eurozone periphery is rebounding at least as fast as it is for the region as a whole,” the analyst said.

But rates in richer countries and those in the poorer ones are still far from the convergence brushed with a decade ago, when the euro was first introduced.

Germany and France today still enjoy borrowing rates far lower than partners to the south. Debt issued by super-safe Germany was trading at about 1.9 percent on Friday and France at 2.5 percent.

Protesters clash with anti riot-police during a demonstration to ask for affordable housing and agai...

Protesters clash with anti riot-police during a demonstration to ask for affordable housing and against government's austerity measures, in Rome, on October 31, 2013
Filippo Monteforte, AFP/File

Low rates mean low returns for investors, though.

“Investors have little hope of gains from Germany and France,” Parisot said, with a chase for a better return pushing them to venture back to riskier countries.

But even though rates may be falling in the periphery, analysts caution that all is hardly solved in the eurozone.

“The convergence will continue, but slowly,” said Cyril Regnant, a bond strategist at Natixis, adding that the “situation has improved, but not normalised.”

Ireland, which left an EU-IMF bailout in December, and Portugal, which should do so in May, are well aware that dangers still lurk.

Their bond sales were limited to a group of pre-set investors, thereby limiting surprises.

“Their return to the markets, is a gradual one,” Parisot said.

And the trading volumes involved are low, meaning that even a pinch of demand can sharply change the borrowing price.

Ronan Blanc, bond manager at Quilvest Gestion in Paris warned that the calm was deceiving.

“There’s no talk of how countries will bring down debt in the long term,” he said.

Italy carries a huge two trillion debt mountain and Spain’s debt hit a new record of 93.4 percent of gross domestic product in the third quarter of last year

Debt of this proportion needs inflation, or years of vigorous growth to wind down, he said.

Or, as with Greece, it can be restructured in a write-off, but this radical solution would only restart the crisis fires.

ECB chief Draghi himself urged caution about this being the start of a lasting turnaround in the crisis.

“It is still premature to declare any victory,” Draghi said, adding the recovery remains fragile.

AFP
Written By

With 2,400 staff representing 100 different nationalities, AFP covers the world as a leading global news agency. AFP provides fast, comprehensive and verified coverage of the issues affecting our daily lives.

You may also like:

Entertainment

Musical artist ChewieCatt chatted about opening for Nick Carter of the Backstreet Boys on his "Who I Am" solo tour.

Social Media

Meanwhile, world, what are you doing about protecting your kids?

Business

Hiring the right people is always important, but especially significant for newer businesses and startups.

Business

The United States and China are engaged in a fierce battle over access to advanced semiconductors - Copyright AFP/File Yuichi YAMAZAKIBeiyi SEOWThe United States...