To start off Global Perspectives for 2014, we come full circle and look at Europe, where the storyline for much of the last five years has been talk about the collapse of the financial system.
Among the market metrics we used during the crisis were the financing rates of the peripheral European countries, and specifically the 10-year government bond yields in those countries. In the heat of the crisis we were seeing rates in the 6-7% range for significant economies like Italy and Spain. Countries on European Union life support like Greece, Portugal and Ireland were not even able to get any private funding of their government debt.
This week, for the first time since the crisis began, a government debt auction was held in Ireland. In the end, the Irish government was able to raise funds from 10-year bonds and paid a yield of 3.54%. This is just over half a percent from where the U.S. has to borrow money. The successful auction spread to the yields of other peripheral European countries and countries like Italy and Spain are seeing their debt trade at 3.88% and 3.75% respectively. Spain’s borrowing cost is back to levels not seen since the crisis began. Even Greece is seeing its 10-year debt trade at 7.55%.
The credit for the turnaround primarily goes to European Central Bank President Mario Draghi, who has proven to be a master at assuring markets of the euro zone’s survival and applying liquidity measures to back up that assertion. At the same time Draghi has kept up the pressure along with European leaders to initiate necessary reforms.
That said, Europe is not out of the woods yet. We also learned this week that euro zone unemployment remains stubbornly high at 12.1%. In addition, this year, the ECB is focused on a series of bank stress tests and credit conditions are tight leading up to those stress tests. At its first meeting of the year this week, the ECB stressed that it will carefully monitor credit conditions and act if the economy slows down too much.
My view: I do believe that 2014 will close the chapter on the sad history of this financial crisis in Europe, but the continent still has to complete the far more difficult task of restructuring key sectors of the economy. If it fails to do that we will be right back here in the same financial mess again a few years down the road.
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