Spain will request a sovereign rescue within a year, while Italy will avoid that fate, as the euro-area’s debt crisis looks set to enter a fourth year, according to the Bloomberg Global Poll.
Almost three years since Greece revised its deficit numbers, triggering financial market turmoil across Europe, 85 percent of 847 investors, analysts and traders who are Bloomberg subscribers said Spain will seek aid in the next 12 months. Fifty-nine percent said Italy will skirt a rescue over the same timeframe.
Speculation over the financial health of the euro-area’s fourth-largest economy today led European Central Bank President Mario Draghi to flesh-out his plan to tame borrowing costs by buying bonds. In a sign his July vow to do “whatever it takes” to defend the euro is working, the poll signaled growing optimism the 17-nation euro area would stay intact through the rest of this year.
“The need of Spain to tap the fund is significantly larger than Italy,” said Ulrich Leuchtmann, head of currency strategy at Commerzbank AG in Frankfurt and a poll participant. “Spain is missing its budget targets by a much wider degree.”
The victim of a bursting real estate bubble, Spain’s economy is in its second recession since 2009 and the unemployment rate is at a European record 25 percent. Fiscal weakness in some regions and slumping tax revenue will leave the government’s budget shortfall this year at more than twice the European Union limit of 3 percent of economic output.
Forty-seven percent of those surveyed said the country will default on its debt, the same amount as in May.
Prime Minister Mariano Rajoy is already negotiating as much as 100 billion euros ($130 billion) for the nation’s ailing banks, and he’s said he would consider asking for EU and ECB bond buying if it’s in the best interest of Spaniards.
Spain sold 3.5 billion euros of securities maturing in 2014, 2015 and 2016 today. The two-year note initially declined as demand fell at the auction. It later rebounded. Ten-year debt yields 6.09 percent. Rajoy may decide to seek aid in the coming weeks to bring down financing costs as the Treasury faces 20 billion euros of bond redemptions at the end of next month.
Draghi announced today that the ECB is willing to make unlimited purchases of short-term debt without setting a specific cap on desired yield levels. The buying will be fully sterilized and may be terminated if a country falls shorts of its commitments, he said in Frankfurt.
While Draghi said only countries who agree to the austerity and monitoring demands of Europe’s rescue fund will get ECB support, Rajoy is holding off on a request until the ECB president lays out conditions for the ECB’s involvement. He met German Chancellor Angela Merkel today in Madrid.
“Draghi’s announcement of intervention shows the robust will of the ECB to solve the problem,” Rajoy told three European newspapers last week. “I will await the results of the ECB and then make a decision that’s good for Spain and for the euro.”
Italy, where the budget deficit was forecast by the European Commission in May to run only about 2 percent of GDP this year compared to Spain’s 6.4 percent shortfall, is better placed, according to those surveyed. Just a quarter see the euro area’s third-biggest economy defaulting, about the same as in previous polls.
Prime Minister Mario Monti, who raised taxes and cut spending to improve Italy’s finances, has shifted his focus to stimulating the stagnant economy, which has lagged the euro- region in terms of growth for more than a decade. He said in an interview with Il Sole 24 Ore published Aug. 29 that his government’s austerity measures are starting to offset market concerns and the country doesn’t need to tap European rescue funds at the moment.
“The adjustment Italy’s government has done will prove more effective than what the Spanish government is doing,” said Tatu Paasimaa, a portfolio manager at Nordea Investment Management in Helsinki who replied to the survey. “Spain will need a bailout in the next six months, but I can’t see Italy needing one at the moment.”
The divergent opinions on Spain and Italy are also reflected in the widening spread between the countries’ bond yields. Investors demand 89 basis points more to hold Spanish 10-year bonds than similar maturity Italian debt. At the start of the year, Italy yielded 180 basis points more than Spain.
Fifty percent of respondents said Portugal will go bankrupt, the smallest response since January 2011, and 21 percent said the same of Ireland, the lowest since June 2010.
By contrast, 92 percent anticipate Greece will default and 56 percent say the country will have left the single currency by the end of next year. Sixty-nine percent Greece will be outside the euro by the end of 2014.
Ninety-eight percent said Germany will keep paying its bills and 89 percent anticipate France to do so. Outside the euro-area, 96 percent said it is unlikely the U.K. will default and 95 percent said the same of the U.S.
Even as the crisis boils away, there were some signs of greater confidence in the outlook, with 27 percent saying the worst of the turmoil is over, a 10 percentage point jump since May. Sixty nine percent still said any evidence of stabilization is temporary, down from 80 percent in May.
With 2012 drawing to a close, 32 percent said one or more countries will leave the euro area by January, the first time this year a majority hadn’t anticipated an exit. Fifty-seven percent forecast a departure this year as recently as May.
Only 6 percent predict the collapse of the euro zone this year and the number anticipating a meltdown in the region’s banking sector retreated to 16 percent from 53 percent a year ago. Only about a 10th said the euro area’s pain will prompt a collapse in the global economy.
Seventy-nine percent said the euro zone economy is deteriorating, down from 84 percent in May. Most respondents still worry economic trouble in Europe will fan social instability such as riots this year although the number declined to 56 percent from 84 percent in May.
The survey was conducted by West Des Moines, Iowa-based Selzer & Co. and had a margin of error of plus or minus 3.4 percentage points.
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