Fading Eurozone crisis coloured by wishful thinking

Every sign that stricken eurozone countries, such as Portugal, are on the road to recovery is held up as evidence that the debt crisis is fading, but wishful thinking is also at work. On Saturday, Portugal is due to emerge from a rescue programme funded by the International Monetary Fund and European Union, without the back-up of a safety credit net. But Portugal still faces a steep climb, including the enforcement of the latest round of belt-tightening measures. Greece is being praised for achieving a budget surplus before interest payments, but still has a huge mountain of debt to pay off. And Spain, in common with the other high-profile rescued eurozone countries, can now borrow at extremely low interest rates, even though its economy is in a fragile recovery from recession and is burdened by extremely high unemployment. "The eurozone is bathing in a post-crisis climate and everyone wants to see the bright side," commented economist Ludovic Subran at French insurance company Euler Hermes. An example was the announcement by Greece on April 23 that the country, the eurozone member where the crisis began and which set the precedent for eurozone rescues, had achieved a primary surplus. And in a coincidence of good fortune, on the same day Portugal sailed though its first regular long-term bond issue since 2011, demonstrating that it had won back the confidence of investors. - Greece and 'sustainable' debt - The European Commission welcomed the Greek primary budget surplus by praising what it termed the "considerable efforts" made to enact reforms imposed by the IMF, the Commission and the European Central Bank. In the same breath, the Commission judged that the country's debt, amounting to 175 percent of annual economic output, was "sustainable". This wave of optimism has obscured questions about the calculation of a "primary surplus" which excludes the cost of paying interest on the debt. There is also the additional cost of supporting the Greek banking sector. The EU's statistics agency Eurostat noted that the primary surplus figure best reflected the underlying structural state of the budget, meaning that revenues were now higher than expenditure, excluding interest payments. The overall public deficit, as calculated under the eurozone Maastricht criteria, including debt interest and bank support, was 12.7 percent of gross domestic product last year. But for Agnes Benassy-Quere, economics professor at Paris I University, the achievement of a primary surplus amounts to "a strong political signal" because "it means that Greece no longer needs to borrow to pay for medicines or to pay its professors, but only to pay for the interest on the debt." This opened the way for Greece to restructure, or to reduce the burden of, its debt, she said, arguing that this effort should be carried mainly by public-sector creditors so as to "leave the way open for private investors" to resume lending to the country. And investors appear willing to do so: a test bond issue by Greece was a great success. With this new-found confidence in stricken eurozone countries, investors have also bought debt issued by Spain, which did not need a national bailout but came close and did need help for its banks. The 10-year borrowing rate for Spain has fallen to less than 3.0 percent for the first time since 2005. Borrowing rates have also dropped sharply for Portugal which, on Saturday, will become the second eurozone rescue case to get back on its own feet, after Ireland. Portugal's return to the market without a safety net has also won plaudits from ratings agencies Moody's and Standard and Poor's. - 'Cash flows back' - "There is a lot of cash in the world and few safe places for it to go," said Benassy-Quere. She said that "cash is flowing back" from emerging economies where it had been invested in massive quantities "and the big investment funds have to find where they can earn a return on their money." Debt issued by the countries in southern Europe now benefited from a sense of security underpinned by the European Central Bank, offered a higher return than debt issued by low-risk issuers such as Germany, and so were a choice target for investment, she said. But, she warned "the situation remains extremely vulnerable" There was a risk of a mini-bubble developing on the bond markets, and meanwhile the crisis had moved into the social arena "of mass unemployment". The outlook for economic growth was unclear "and the problem of debt has not been resolved," she said. Subran said that sentiment on financial markets and within rating agencies was unduly impressed by anything which had the ring of success for reforms. Referring to the new leftist head of the Italian government, Matteo Renzi, he commented: "He hasn't done anything so far, but he has a high confidence rating." This was based on statements of intent alone, he said. Italy's 10-year borrowing rate has just fallen below 3.0 percent for the first time since the euro was created.