IT HAS been impossible to tune out the din from the Fed on tapering, with the exit from QE dominating sentiment. But don’t be fooled into thinking the Eurozone crisis has disappeared. Europe has been on a slow boil, and could burn investors again this year or even worse in 2014 – when the first decent returns from Europe are baked into corporate forecasts.
Shaky support from coalition partners in Greece and Portugal, and a gulf between them and opposition parties on economic policy, has thrown restructuring programmes into question. This has led to a series of short-term deadlines to force resolutions between political parties, as unpopular austerity measures bite too deep for voters.
Market watchers think more debt forgiveness and a restructuring of bailout programmes are inevitable. Chairman of Official Monetary and Financial Institutions Forum David Marsh believes there will be another write-off of Greek debt following the German election in September. The question is whether Greece can limp along for another few months even with the aid of German gifts – like finance minister Wolfgang Schauble’s offer of €100m (£85.9m) to support small and medium-sized Greek businesses. He complimented the Greeks on their strides towards economic consolidation and balancing the budget. But faint praise won’t help reduce debt or unemployment.
For now, the Germans still deny debt levels are unsustainable. But chancellor Angela Merkel admitted last week that a second haircut on Greek debt would destabilise the Eurozone, and Paul Donovan, global economist at UBS, agrees that investors should expect more pain from Greece and Portugal. He is resigned to the worst-case scenario as outlined by Portugal’s President Anibal Cavaco Silva: that the country will likely have to postpone a return to the debt market next year to raise cash. That would force Portugal to request another bailout, but Donovan questions what the terms would be, given that suggestions of a further €4.7bn in budget cuts in 2014 triggered a political crisis.
It is a valid point. Portuguese secretary of state Carlos Moedas recently spoke of Portugal’s efforts to sharpen its finances while others dragged their heels. He warned that sluggish reforms elsewhere were impacting Portugal’s borrowing costs and sentiment. The tone suggests little appetite for more painful measures. Growth pencilled in for next year of 1.1 per cent has now been lowered by the Bank of Portugal to 0.3 per cent.
Perhaps it’s an early warning that 2014 will stay bleak for the Eurozone, as political deadlock and a weak macroeconomic environment destroy any hope that European companies could reap returns from painful investments.
Karen Tso is an anchor for Squawk Box Europe on CNBC. You can follow her on Twitter @cnbckaren