Southeast Europe Faces Euro Debt-Crisis Fallout, McGuire Says
Southeast Europe’s emerging economies must brace for a slowdown as the euro-region debt crisis saps demand for their exports and investment dries up, said Richard McGuire, an economist Rabobank International.
Nations in the region, a “victim” of the crisis in the bloc that some of them aspire to join, must keep sound fiscal policies without necessarily resorting to austerity to weather the fiscal storm, McGuire, a fixed-income strategist, said in an interview in the Serbian capital of Belgrade yesterday.
A lack of bank credit and declining business and consumer confidence in the euro area will damp demand for exports from southeast Europe and foreign-direct investment there, he said. That may “limit the scope at least for any upgrade of country ratings and perhaps increase the risk of downward movements in country ratings.”
The euro-region economy is cooling as governments struggle to restore investor confidence in their ability to prevent a Greek default and halt contagion from the debt crisis. Spanish and Italian bond yields have surged to record highs, forcing the European Central Bank to buy their debt in a bid to bring down borrowing costs.
While the bond purchases initially shaved off about 100 basis points from Italy’s 10-year bond yield, it has crept back up toward 6 percent even as the Frankfurt-based central bank continues to prop up the nation’s debt. Policy makers such as Italian Finance Minister Giulio Tremonti have said collective- debt instruments backed by all the currency members, so-called euro bonds, may solve the sovereign crisis.
“Tensions have increased and pushed politicians to where the market thinks is the eventual endgame -- a possible fiscal union and euro-bond issuance,” London-based McGuire said. “Ultimately, the market will want to see the fiscal unity.”
He said Rabobank was “attributing a 70 percent probability to the euro zone remaining in its current form and that nobody leaves.” A 30 percent probability of “someone leaving” would be “more likely driven not by a group led by Germany telling Greece to leave, but Greece perhaps leaving of its own accord.”
Spain and Italy will feel continued pressure as investors realize there’s not enough money under European Union financing mechanisms to bail them out, McGuire said. Euro-area nations are in the process of approving upgrades to the region’s 440 billion-euro ($595 billion) rescue fund. Italy has 1.9 trillion euros in debt, more than four times the fund’s capacity.
The International Monetary Fund on Sept. 20 predicted “severe” repercussions if Europe fails to contain the crisis. In the euro area, the IMF cut its economic-growth forecast to 1.6 percent from 2 percent this year and to 1.1 percent from 1.7 percent next year. The Washington-based lender also said it’s “very worried” that European banks will seek to boost their capital buffers, leading to a “credit crunch.”
Southeast Europe, which includes EU-members Bulgaria and Romania as well as Croatia and Serbia, will continue to grow at “less than pre-crisis average,” the IMF said. The four economies, with a combined gross domestic product of close to $400 billion, will expand between 0.8 percent and 2.5 percent this year, the IMF said, with Croatia “continuing to struggle.”
Southeast European nations should ensure their budgets remain “in good health” to avoid higher debt-servicing costs, McGuire said. The region should neither refrain from new borrowing nor turn to austerity measures, as much of the euro region has done, he added.
“You can provide stimulus if the market is confident that it’s part of a broader, credible, medium-term plan that will bring the budget back toward balance,” McGuire said.
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