Written on January 25, 2011
Most global investors predict at least one nation will leave the euro-area within five years and that Greece and Ireland will default, sentiment that is intensifying pressure on policy makers to strengthen their response to the debt crisis.
As the World Economic Forum’s annual meeting gets underway, 59 percent of respondents in a Bloomberg Global Poll said one or more of the 17 euro nations will quit by 2016, including 11 percent who see an exit within 12 months. Respondents were divided over whether Portugal would default, while a majority expressed confidence in Spain.
Such pessimism underscores the urgency German Chancellor Angela Merkel and French President Nicolas Sarkozy face in their hunt for new ways to placate investors after almost $1 trillion in emergency financial support failed to calm markets. Europe’s plight ranks high on the agenda for the conference in the Swiss ski resort of Davos, where Merkel, Sarkozy and European Central Bank President Jean-Claude Trichet are among the 2,500 officials, bankers and economists attending.
“The problems in Europe have been addressed, but only with a band aid,” said Ted Jarvis, senior vice president at the Indiana Trust Company in Anderson, Indiana, who participated in the survey. “Several euro members have not followed the correct policies and dug themselves a deep hole.”
‘Tarnished for Life’
Respondents in the poll completed this week of 1,000 investors, analysts or traders who are Bloomberg customers were almost evenly divided about whether the euro area will eventually collapse. Most of the 45 percent who anticipated a breakdown said it wouldn’t occur in the next five years; 48 percent said it would never happen.
“It’s very difficult to imagine a scenario in which the euro would break up,” said Kennth Broux, a senior market economist at Lloyds TSB Corporate Markets in London and another of those surveyed. “The political investment in the project is way too high and Europe’s debt market is now the biggest in the world.”
Portugal’s 10-year bond fell yesterday, pushing the yield up 12 basis points to 7.06 percent, 392 basis points more than on the comparable German bond. Spanish bond yields climbed 10 basis points to 5.25 percent, while the yield on Greece’s 10- year bond gained 12 basis points to 11.34 percent.
A year after Greek officials toured the halls of the Davos Congress Center in an ultimately futile bid to bolster demand for their bonds, Europe’s governments are now trying to augment the crisis-fighting toolkit they designed when rescuing that country in May and Ireland in November. Among the proposals being discussed are boosting the region’s 750 billion-euro ($1 trillion) rescue fund, helping countries buy back their bonds and lowering interest rates on bailout loans.
“We support whatever is needed to support the euro,” Merkel, who will address the Davos meeting Jan. 28, said on Jan. 12.
As well as the majority predicting a euro-zone member withdrawing within five years, another 13 percent said a country will leave after that. Just under a quarter said the region would remain intact. Almost half of the euro-zone poll participants said the euro region will keep its current form, four times as many as in the U.S.
Trichet, who is attending his final forum meeting as ECB chief, calls the idea of the euro area losing a member an “absurd hypothesis.” Some of the economists and historians visiting Davos are not as confident, with Massachusetts Institute of Technology professor Simon Johnson predicting Greece and perhaps Portugal will depart at some point.
“The euro-zone will come out of this, but with a stronger core and some leaving,” Johnson, a former chief economist at the International Monetary Fund, said in a Jan fast cash loans. 5 interview. Harvard University Professor Niall Ferguson told Bloomberg Television on Jan. 12 that the euro risks “disintegration” unless its leaders agree to a more binding fiscal union.
While Greece’s government denies it’s studying ways to restructure debt, almost three-quarters of poll respondents said the country ultimately would likely default; 53 percent said Ireland would also probably do so.
Funded by Debt
“Nobody mentions that all these debt bailouts are funded with additional debt,” said Kevin Baldauf, a portfolio manager at Wafra Investment Advisory Group Inc. in New York, who views Greece as likely to default. “You can’t solve a debt problem with additional debt. It buys you time, but hurts you in the medium to long run.”
As for Portugal, 47 percent said it will likely default and 48 percent said it’s unlikely to. Two-thirds of the investors said Spain won’t default and three-quarters didn’t anticipate Italy doing so.
The cost of insuring Portuguese debt against default rose 14 basis points to 442 basis points, down from a record 551 on Nov. 30. Spain’s credit default swaps gained 12 basis points to 267, down from 365 basis points on Nov. 30.
“More likely than a breakup and more urgent is the need for some countries to restructure their debts,” said Nariman Behravesh, chief economist at consultants IHS in Lexington, Massachusetts, who is attending the Davos meeting. “It is going to happen sooner rather than later.”
By comparison, more than 90 percent of those questioned said neither the U.S. nor U.K. will default. Forty-six percent see a good chance U.S. will be infected by the crisis, while 53 percent say it’s unlikely. Half said that the dollar will be stronger against the euro in three months, up from 33 percent in November. The euro traded yesterday at $1.37, down 1.7 percent since the end of October.
Sarkozy and Merkel are both delivering keynote speeches in Davos this week. Trichet will participate in a session on the euro tomorrow, while EU Economic and Monetary Affairs Commissioner Olli Rehn — who said Jan. 12 no country will restructure its debt — will appear on a similar panel the same day alongside Greek Finance Minister George Papaconstantinou.
EU officials are eyeing a March 24-25 summit to complete a comprehensive package of reforms that overhauls their rescue tools, maps out a future aid mechanism and tightens fiscal coordination. Other Davos attendees include Klaus Regling, the manager of the euro-region’s bailout fund, Bundesbank President Axel Weber and Spanish Finance Minister Elena Salgado.
Investors are expressing confidence in the performances of European leaders, the poll showed. Sixty-nine percent said they had a favorable view of Merkel and 63 percent had a positive opinion of U.K. Prime Minister David Cameron, while 56 percent viewed ECB’s Trichet favorably.
Asked if they expected governments to take steps to rein in bank bonuses, 62 percent said they didn’t and 34 percent said they did.
The quarterly Bloomberg Global Poll of investors, traders and analysts was conducted by Selzer & Co., a Des Moines, Iowa- based firm, and is based on interviews with a random sample of 1,000 Bloomberg subscribers. It was conducted Jan 21-24 and has a margin of error of plus or minus 3.1 percentage points.