February 2012
- The spectre of a Greek default returns.
- European Union leaders agree a fiscal pact.
- data improves, although unemployment remains a concern.
European investors were able to shrug off the possibility of a Greek default and political in-fighting to start 2012 in a sprightly fashion. Risk appetite was much in evidence, propelling the FTSE Europe ex-UK index up an impressive 4.5% for the month.
As ever, the sovereign debt crisis dominated proceedings, with Greece once again thrust into the limelight. Debate raged between the Mediterranean miscreant and its creditors about the size of losses banks and bondholders should take as part of a restructuring deal aimed at bringing Greece’s debt down to manageable levels. At the time of writing, negotiations were ongoing – and somewhat fractious. The protagonists have until 20 March to reach an agreement or Greece, which has a €14.5 billion bond payment to settle, could face a disorderly default. Meanwhile, Standard’s & Poor’s made few friends in Europe’s corridors of power after it removed the AAA credit ratings from Austria and France. Paris was quick to dismiss the downgrade – “it changes nothing,” said a defiant President Sarkozy - while stocks, bonds and the euro were largely unmoved.
But the news improved from there on in. Markets responded favourably after European Union leaders finally agreed to support a fiscal discipline treaty. The pact – which was born and nurtured in Berlin – means that eurozone countries will be legally obliged to balance their budgets over time. Many Keynesians balked at the deal – where will the growth come from? they asked - but others believe that now Germany has its deal it will finally put all its fiscal clout behind the single currency project. The European Central Bank is certainly doing its part to keep the financial system ticking over. Its three-year long-term refinancing operation at the turn of the year was a marked success. Rumblings on trading-room floors suggest the next emergency auction on 29 February could see take-up nearly triple, topping €1 trillion. This, in turn, should support peripheral bond markets and risk assets in general.
On the economic front, eurozone manufacturing and services PMIs rebounded unexpectedly in December thanks to robust output growth from Germany and a mild expansion from France. Meanwhile, the much-watched German Ifo survey of business sentiment rose for the third consecutive month, raising hopes that the continent’s economic powerhouse can pull the rest of the region back from the brink. But euro-area unemployment numbers dampened spirits somewhat, touching a record-high of 10.4 million in December.
