January 26, 2012 / 3:57 PM / 8 years ago

More pain awaits euro zone periphery

LONDON (Reuters) - Greece, Portugal, Spain, and to a lesser extent, Ireland, still face a year or two of economic strife as severe austerity measures rip into growth prospects for the euro zone’s weakest members, a Reuters poll showed.

These struggling economies were already on a different growth path from the big core countries of Germany and France but that road appears to be splitting again - with Portugal slipping further behind its weak peers.

The dismal outlook means European leaders are now searching for strategies to boost growth and employment, but after years of preaching austerity and telling wayward governments to cut spending and raise taxes few easy solutions are available.

Portugal’s fortunes are fast on the decline, and economists said it was looking likely that it would need a second bailout from the European Union and International Monetary Fund.

A Reuters poll of over 20 economists taken this week said Portugal’s economy will contract 3.2 percent this year and stagnate in 2013, although the latter forecast is better than a 0.9 percent contraction predicted in November.

A separate survey taken at the same time, meanwhile, suggested economists have mixed feelings about the role of credit ratings in the euro zone debt crisis.

“Portugal and Greece are going to suffer pretty severe recessions regardless of what policymakers do over the coming weeks and months to save the euro zone,” said Ben May at Capital Economics, who was far below the consensus in predicting Portugal’s economy would contract 8 percent next year.

All of the four countries in the poll will suffer double-digit rates of unemployment for the next couple of years, well above the latest euro zone average of 10.3 percent. Spain and Greece will have the worst jobless rates.

Greece, the epicenter of the debt crisis that started over two years ago, will suffer an economic contraction of around 3.7 percent this year - marking its fifth year in recession - before stagnating in 2013.

These growth forecasts, weak as they are, presume a debt swap between the government and its private creditors happens quickly and averts a chaotic default in March. Tortuous negotiations resumed on Thursday.

And it looks increasingly likely that Lisbon too will again have to seek outside help with its financing.

A separate poll of 50 economists suggested there is a 70 percent chance that Portugal will require a second EU/IMF bailout at some point.

Portugal has already borrowed 78 billion euros in an EU/IMF deal but it has struggled to meet the terms set out as part of the loan.

“Portugal will need to restructure at some point as, like Greece, they relied a lot on foreign investors and don’t have the domestic market to buy their bonds like Italy and Spain,” said Alessandro Giansanti, rate strategist at ING.

Portuguese 10-year government bond yields have failed to recede to manageable levels since its 78 billion euro ($101 billion) bailout last May.

On Thursday, they yielded around 15 percent at euro-era highs, but economists say governments cannot sustain borrowing costs of more than 7 percent for long.

Spain’s economy will contract around 1.0 percent this year, a lot less than either Portugal or Greece but with huge unemployment that will average near 23 percent this year.

Ireland’s economy should at least expand over the next couple of years and its government borrowing costs have fallen sharply, but it still faces a battle to exit its bailout program next year.


A raft of business surveys from the last few months suggest the wider euro zone economy is struggling to gain any traction outside Germany, and to a lesser extent France.

The lack of any real growth strategy, particularly in the periphery, was one reason why Standard & Poor’s downgraded the credit ratings of nine euro zone countries earlier this month.

Still, economists hold a mixed view of the way ratings agencies have handled the debt crisis.

A fairly modest majority of economists in a separate poll - 28 out 49 - thought ratings agencies still provide effective and independent analysis of credit worthiness, based on their actions so far in the debt crisis.

Credit ratings agencies received a barrage of criticism in the aftermath of the global financial crisis, caused in part by the collapse of mortgage-backed assets in the United States they rated rock-solid, but turned out toxic.

The poll suggested there is a great deal of doubt among economists over whether S&P was right to cut the ratings of nine euro zone countries, including the withdrawal of France and Austria’s coveted “AAA” top-notch rankings.

Only 21 out of 46 economists thought S&P’s euro zone ratings reflected the situation better than rivals Moody’s and Fitch, which have so far refrained from wholesale downgrades of euro zone sovereign credit ratings.

Still, some economists argued that some of the downgrades were appropriate.

“When looking at the underlying fundamentals, France is not an ‘AAA’ country anymore,” said Alessandro Bee, economist at Sarasin, a Swiss private bank.

“The downgrade is therefore fully warranted.”

Additional reporting by Nigel Davies in Madrid, George Georgiopoulos in Athens, Andrei Khalip in Lisbon and Padraic Halpin in Dublin; Polling by Aakanksha Bhat and Shaloo Shrivastava; Editing by Toby Chopra

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