S&P Sees Emerging Markets Driving Europe Recovery in Second Half

Europe’s economy will probably recover gradually in the second half of this year from a recession that began last quarter, Standard & Poor’s said.

“A central assumption behind this forecast is that emerging markets hold up well,” Jean-Michel Six, S&P’s chief economist for Europe, the Middle East and Africa, said in an interview in Moscow yesterday. “The other condition is a gradual return of confidence by international investors on capital markets, especially on the sovereign-bond markets in Europe.”

European officials and creditors of Greece are trying to conclude talks that may offer the indebted euro member a second international bailout to help it remain in the currency union. The European Central Bank’s long-term refinancing operation, also known as LTRO, of more than 400 billion euros ($527 billion) in three-year loans offered in December at 1 percent is already helping, according to Six.

“We’ll see how much more is being raised at the second LTRO that’s going to take place in the next few days,” he said. “At this point, the money injected by the central bank is staying within the financial sector and therefore is not morphing into real money.”

Emerging markets such as China and India, the world’s two most populous countries, will need to maintain growth while trying to curb inflation and price bubbles to ensure that Europe doesn’t face a steeper drop in output, Six said.

“Central banks have been, by and large, successful at orchestrating that soft landing without having a crash,” Six said before an appearance at an investment conference in Moscow.

China was able to cut inflation to 4 percent from 6 percent last year and has shown “convincing evidence that the housing markets are also going down without crashing,” Six said. India is facing “sticky” core inflation that may prevent policy makers from easing credit conditions as quickly as in other markets, he added.

To contact the reporter on this story: Scott Rose in Moscow at rrose10@bloomberg.net

To contact the editor responsible for this story: Balazs Penz at bpenz@bloomberg.net

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