Greece and Co. are beneficiaries of Berlin’s home-made budget crisis: While Germany is paralyzing itself, the former “periphery” of the Eurozone is becoming the new investor star. Because things are now going much better there than in the “core states”.
About a decade after the start of the euro crisis, a gradual reversal of roles is taking place on the bond market. Many of the common currency’s former problem children have now become model budget students as a result of years of austerity policies. In the previous anchors of stability such as Germany and France, however, the prospects are poor due to self-inflicted growth and budget crises. Greece, Portugal and Spain are therefore increasingly outstripping the core states of the Eurozone in the bond market.
As the financial agency “Bloomberg” reports, the fund managers at JPMorgan and Neuberger Berman are increasingly stocking up on debt securities from Spain, Portugal and Greece. Analysts expect that the peripheral countries will continue to do a much better job in the coming year than the founding members at the center of the common currency.
The world of professional investors is increasingly turning upside down: for years the “core” of the Eurozone was considered reliable and stable, and the edges of the monetary union as shaky, but the situation is now increasingly being reversed. It is not the former debt sinners in the South who have to justify themselves. But the brakes on growth in the donor countries.
From an anchor of stability to a brake on growth
Above all in Germany: the prospects here are worse than they have been for a long time – and hardly anywhere else on the entire continent. The economy slipped into recession in the third quarter, and the EU Commission expects a decline of 0.3 percent for the year as a whole. Only in Austria, Sweden, Hungary, Ireland and the Baltics is an even greater slump expected. With the Federal Constitutional Court’s budget ruling, Berlin is shooting itself in the foot even more.
In the former debtor countries, however, things are going brilliantly: In Spain and Greece, the economy is expected to grow by 2.4 percent this year, in Portugal by 2.2 percent and even in Italy by 0.7 percent. And while the EU Commission gave the green light to the budget plans of Greece, Ireland and Spain in its annual budget check for the coming year, Germany and France failed. Paris even received an explicit reprimand in the summer that it would spend a maximum of 2.3 percent more next year than this year – which the Macron government has so far studiously ignored.
The market shift can be seen primarily in the returns of previous shaky candidates. The gap between ten-year bonds from Germany and Greece is now just 1.2 percent – at the height of the debt crisis it was over ten percent. In Spain the surcharge is just under 1 percent, and in Portugal it is only 0.6 percent. “The smaller euro countries have significantly improved their budget figures and their positive outlook is reflected in the European bond markets,” Bloomberg quoted an analyst at Société Générale as saying.
There are no longer any drawers for Euro bonds
For Commerzbank, for example, the changes are so serious and lasting that the old grid thinking in the Eurozone has become obsolete. “The traditional country classification on the markets has been broken,” “Bloomberg” quotes Coba interest rate strategist Michael Leister. “The fundamentals no longer justify the long-established distinction between core states, semi-periphery and peripheral states.”
Of course, the convergence of yield discounts will not change the structural debt levels and thus long-term risks for the time being. Although Athens’ debt ratio is currently falling at the fastest pace in the entire euro zone, Greece’s mountain of debt continues to pile up to a gigantic 161 percent of economic output. In Germany, however, it is just around 65 percent.
Nevertheless, constant change can change the calculations of many investors. Because three quarters of the Greek national debt is held by the EU rescue package. This now makes it almost as safe a bank as Germany. As long as the former peripheral states remain on the path to reform and growth, investors’ appetite for their bonds is unlikely to diminish. They are apparently happy to throw their old ways of thinking overboard for a little more return.