Once again, the spotlight is on Greece, as Eurozone finance ministers meet to finalise the terms of the next tranche of money to support the beleaguered Greek economy.
Representatives from the European Union, European Central Bank and International Monetary Fund have repeatedly called for more details and evidence of progress from the Greek authorities before agreeing to release the funds, and progress has been slow.
At stake is a payment of €130 billion in support of the troubled Greek economy accompanying a €200 billion debt restructuring with private holders of Greek bonds as part of a plan to reduce debt from 160% of GDP to 120% by 2020. The austerity plans agreed by parliament have been deeply unpopular with parts of the Greek public, and Athens has witnessed scenes of rioting as protesters clash with police. If agreement is not reached, there is a risk that Greece will have to default next month, when a €14.5 billion bond repayment is due.
The situation remains fast moving, but it is clear that the confidence of the negotiating partners in the ability of the Greek government to deliver the austerity measures they require is diminishing. It has been reported that a number of the Northern members of the Eurozone are openly discussing the possibility of a Greek default and withdrawal from the Euro, in sharp contrast to the position late last year.
We believe it's unlikely that the other Eurozone members would formally expel Greece. Instead, we think the Greek authorities would leave of their own volition in response to the increasingly unrealistic demands of them by the creditors. Ultimately, however, this is a political decision, and therefore difficult to predict with any accuracy.
From an investment perspective, the possibility of debt rescheduling has long been reflected in the price of Greek bonds in the form of a hefty risk premium. Our exposure to Greece remains either zero or extremely low across portfolios we manage. It is a very small component of benchmark indices and, given the uncertainty, we believe a better balance between risk and return can be found elsewhere.
For the Eurozone as a whole, although some risk remains, the combination of a permanent €500 billion Eurozone bail-out fund, set to start by the middle of the year, and the availability of low-cost loans from the European Central Bank should help to shore up vulnerable areas of the financial sector, mitigating the risk of contagion, as well as lending support to countries such as Spain and Italy.
Our view remains that the economic prospects for the Eurozone are poor in the short and medium term, with a recession likely this year and perhaps next. However, with some of the obvious structural risks now mitigated, we believe there is investment potential to be found in European equities, particularly where their business is primarily derived from outside Europe, and in certain areas of the European debt markets. In particular, we recently increased exposure to Italian debt across our range of multi-asset strategies, attracted by yield levels and declining systemic risk in the region following action by the European Central Bank.
Andrew Cole
Director, Multi Asset Group, Baring Asset Management, London
|
