The Quiet Recovery in Europe
January 10, 2014
Senior Vice President City National Foreign Exchange Manager
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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