European Rally Belies Slog Ahead With Debt at Record

The rally in European bond and stocks markets masks the slog that looms as the euro area confronts record unemployment and debt.

Spain, whose banks were bailed out in 2012, sold 2.66 billions euros ($3.62 billion) of three-year debt at the lowest yield on record today. The Euro Stoxx 50 Index has gained 19 percent in the past six months to its highest since the collapse of Lehman Brothers Holdings Inc. in September 2008.

“Markets are breaking record after record but the recovery remains feeble,” Isabelle Job-Bazille, chief economist at Credit Agricole in Paris, said today in an interview. “A lag between financial markets and the real economy may be normal, but markets are being very optimistic. Structural brakes on the recovery are still there, notably the debt burden.”

Her view was supported this week by European governments most damaged by the crisis. Officials and ministers from Greece, Ireland, Portugal and Cyprus, told European Union lawmakers how their countries’ emergency aid had been followed by social hardship and continuing economic difficulties.

The austerity demands that came with Portugal’s bailout had a “worse-than-expected impact on both output and employment,” its finance ministry said. Cyprus’s central bank says the island’s package has been “rigorous and painful.” Adjustment in Greece, after four years of cuts, has come at “an extremely high socioeconomic cost,” Greek Finance Minister Yannis Stournaras said.

Bailout Costs

The testimonies come three-and-a-half years after Greece became the first euro-area country to be bailed out, using EU and International Monetary Fund loans. Since then, the German-led path of aid in return for reforms and debt cuts has seen 396 billion euros committed to the region’s four most fragile economies, with an additional 100 billion euros pledged for Spain’s banking sector. The euro area has endured the longest recession in its history and unemployment in the 18-nation bloc was at a record 12.1 percent in November.

Yet investors have responded to a record-low interest rate set by the European Central Bank and ECB President Mario Draghi’s 2012 pledge to do “whatever it takes” to save the euro. Meantime, the longest euro-area recession ended in the second half of 2013 and governments are easing up on budget cuts.

Government bonds in the euro-area’s most indebted nations have rallied this year, pushing Portugal and Ireland’s 10-year yields to the lowest since 2010 and 2006 respectively, as recovery signs in the region have boosted demand for higher-yielding debt.

Portugal Auctions

Portugal expects to restart bond auctions in the first half of 2014, its debt agency said yesterday, after selling one-year bills at the lowest yield since November 2009. Portugal has an unemployment rate of 15.6 percent.

Greece’s Stournaras said last week that the government may sell five-year notes in the second half of the year, for the first time since being shut out of the bond markets in 2010. It would follow Ireland, which sold bonds last week for the first time since completing its bailout program.

Greek 10-year yields have dropped 68 basis points this year to 7.74 percent, after touching 7.53 percent on Jan. 13, the lowest since May 2010. The yield on similar-maturity Portuguese securities reached the lowest since August 2010 at 5.07 percent yesterday.

EU lawmakers questioned whether the so-called troika, comprising the European Commission, ECB and IMF, which sets conditions for the countries receiving bailouts and monitors their progress, should have been more accountable and could have prevented the most painful effects of austerity.

While finance ministries and central bankers said that the hardships associated with the bailout conditions could not be ignored, they said they backed the process.

Inevitable Program

“The program, although rigorous and painful, is the only way that will enable the country’s exit from the crisis,” Cyprus’s central bank said in its letter to the 28-nation European Parliament.

Portugal’s finance ministry said that it “remained convinced” a bailout program had been inevitable and that “on the whole it remains a suitable and rational response to the crisis of credibility threatening our country.”

Ireland’s bailout-program exit last month and its return to financial markets “confirms that our strategy of providing assistance to euro-area countries that requested it in return for strict conventionality is working,” Jeroen Dijsselbloem, the Dutch finance minister who chairs meetings of his euro-area counterparts, said in his letter to EU lawmakers.

He said that while growth is returning to the euro area and the economic outlook is improving “a number of important challenges remain, most importantly unacceptably high levels of unemployment.”

Ireland’s bailout program can be considered a success, Michael Noonan, Ireland’s finance minister, said in his response to the parliament. Even so, unemployment is still high, economic growth has returned more slowly than predicted and the country’s overall level of debt remains elevated, with a peak of slightly over 120 percent of gross domestic product expected this year.

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