Norway Sees Deeper European Job Pain as Default Fears Recede

Norway’s Prime Minister Jens Stoltenberg said Europe’s success in calming debt markets doesn’t alter the fact that the continent is sinking into a deepening labor market crisis.

While Europe’s leaders have persuaded bond investors they’re unlikely to suffer defaults, the region now faces deteriorating economic prospects, Stoltenberg said in an interview in Oslo yesterday.

Norway is “very glad for the efforts being made by the European Union and the European governments to manage the acute financial crisis they faced,” Stoltenberg said. “But the fundamental problems are still there: they have low economic growth and high unemployment, and unemployment is still increasing, and that’s a big economic problem and a big social problem.”

Unemployment in the 17-nation euro area reached a record 11.8 percent in November, with Spain topping the jobless rankings at 26.6 percent, the European Union’s statistics office said on Jan. 8. The region’s economy contracted in the second and third quarters of last year, while German Chancellor Angela Merkel warned Dec. 31 that the economic environment this year will be even more difficult than it was in 2012.

Contracting Economy

The euro area will contract 0.1 percent in 2013, the Washington-based World Bank projected yesterday, cutting its previous prediction for 0.7 percent growth. The single currency bloc probably shrank 0.4 percent in 2012, it said.

Still, yields on bonds sold by some of Europe’s most indebted nations have eased since European Central Bank President Mario Draghi pledged in July to do whatever it takes to protect the euro.

“When market pressure is receding, as right now, the risk of complacency is quite large,” Moritz Kraemer, managing director of Standard & Poor’s, said in an interview with Bloomberg Television’s Mark Barton today.

The yield on Spain’s 5.85 percent bond due January 2022 eased to 5 percent yesterday, from as high as 7.6 percent before Draghi’s comments last year. The yield on Italy’s 5.5 percent bond due November 2022 traded at about 4.2 percent yesterday, compared with almost 6 percent in August.

Spain’s 10-year yield traded about two basis points higher today at 5.03 percent, while Italy’s similar-maturity bond yield gained three basis points to about 4.24 percent. The yield on Norway’s benchmark 10-year bond eased two basis points to 2.36 percent as of 9:54 a.m. in Oslo.

“The character of the financial crisis has changed from a crisis in the financial markets risking bank defaults and sovereign defaults to problems in the labor market and high unemployment,” Stoltenberg said.

Outside EU

Norway, which like Switzerland isn’t a member of the European Union, has managed to steer clear of the region’s crisis thanks to its $700 billion sovereign wealth fund. Norway boasts the biggest budget surplus of any AAA nation and credit default swaps suggest it’s the world’s safest credit. Unemployment in western Europe’s largest oil exporter was 2.4 percent in December, according to non-seasonally adjusted figures provided by the Labor Ministry.

Norway’s wealth fund, which absorbs much of the country’s oil and gas income to avoid overheating the domestic economy, is shifting investment away from Europe to capture more global growth. The fund increased its holdings of debt denominated in emerging market currencies to 8 percent of its fixed-income portfolio in the third quarter, from 1.5 percent at the end of last year, it said Nov. 2.

Bond Returns

Still, investors who bought bonds sold by the euro area’s most indebted nations reaped the highest returns last year, according to Bloomberg/EFFAS Indexes. So far this year, Italian, Spanish and Irish bonds are the best performers of the 144 bond indexes tracked by Bloomberg. Europe’s efforts to end its crisis have stabilized debt markets, Stoltenberg said.

“Hopefully we have seen the worst and the danger of states not being able to pay their interest on public debt, or sovereign risk, is very much reduced,” he said.

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