Europe catches its breath

February 24, 2011

Last week the European Central Bank discontinued buying the debts of weaker countries within the eurozone for the first time since October 2010. The European government debt crisis may be stabilizing, experts indicate, but it is too early to talk about improvements in their financial status.

At the end of January 2011 the European Central Bank (ECB) stopped buying the debts of the more indebted countries within the euro area for the first time since October 2010. The regulator was propping up the bond markets in the PIIGS countries (Portugal, Ireland, Italy, Greece, Spain), extended by some analysts to BI-PIGS on the back of financial turmoil in Belgium. Though most market players were convinced that the debts of the weakest “Europeans” – Greece, Ireland and Portugal – account for the bulk of the buy-out. So far these transactions have acted as a means of supporting the financially-challenged European states by sustaining the growth of government bond yields, somewhat alleviating the debt burden on their budgets.

Over the last eight months, the ECB has acquired several tens of billions worth of euro country bonds, and whereas previously the regulator reported having spent EUR76.5 billion, the current figure being mentioned is EUR68.2 billion, according to Vedomosti. It is expected that the European Financial Stability Facility that has itself placed a debut issue of five-year bonds for a total of EUR5 billion last week is going to take over the bailing out of BI-PIGS and other debt-overburdened countries within the eurozone. The critical decision on the issue has already being taken and by March the EFSF will be able to conduct interventions in the debt securities markets to support the weaker euro area countries, RBCdaily reports.

Experts differ in their assessment of ECB actions. Some say that the government debt crisis in the faltering euro area countries has in fact stabilized, supported by successful bond issues by Spain and Portugal, and a rise in the euro (probably due to an inflow of investments), therefore justifying the regulator’s decision to wind down its anti-crisis support to financially challenged European states. At the same time, most analytics perceive the condition of the euro area as negative. For instance, on January 31, 2011 John Lipsky, First Deputy Managing Director of the International Monetary Fund said that it is too early to talk about stabilization in the euro zone, and even the EU and IMF loans extended to two of the weaker countries – Greece and Ireland – would hardly save the day. Meanwhile, other non-BI-PIGS countries are also accumulating debts. The average government debt in the EU is 71.4% of gdp, Eurostat reports, whereas according to the Euro Convergence Criteria it must not exceed 60% of gdp.

Most of the respondents in a survey conducted by Bloomberg in the second half of January 2011 said that the euro zone will remain one of the weakest spots for the global economy over the next 5-7 years. A number of the leading global investors are convinced that the EU authorities’ actions will not allow preventing defaults on obligations in Greece and Ireland at least and possibly in Portugal and Spain as well. Curiously enough, at about the same time Olli Ren, Commissar of the European Commission, announced that EU authorities are not planning to increase the European Financial Stability Facility in the near future.

Largest euro debtors:

(to gdp)

  • Italy – 115.8%;
  • Greece – 115.1%;
  • Belgium – 96.7%;
  • Hungary – 78.3%;
  • France – 77.6%;
  • Portugal – 76.8%;
  • Germany – 73.2%;
  • Great Britain – 68.1%;
  • Ireland - 64%;
  • The Netherlands – 60.9%.