財經觀察 2291: Euro Sovereign Debt Scare...GPS Guidance

Tiny trigger - big impact?
The events looks familiar to us. Trouble starts in a corner of the credit market, spreads to equities and eventually has a large impact on major economies. But may we really have to see it all again? We do not think so. Greece, Portugal and Spain (GPS) are just 16% of Euro GDP. Greece and Portugal have serious fiscal issues, in our view, but we do not think they are close to subprime. In 2008, policy mistakes contributed to the damage, in our view. This time, we have not seen any such mistakes yet. In 2008, issues were mounting pre-Lehman already. Now, we believe that financial institutions are mostly recovering while leading economic indicators point up.

The proof is in the funding
Credit default spreads can sound the alarm. But the proof is in the funding. As long as Greece, Portugal and Spain can raise the money to pay the bills, we think they can withstand the storm if they are ready to pay the price. We believe the risk of actual default remains small

Financial crises have their own dynamic
However, even if most investors believe that none of the GPS will default, they may not be ready to buy the bonds as long as momentum is against them. Markets can force crises to come to a head.

Next steps: Watch the EU meetings
The EU has already taken one step, putting Greece into a fiscal straightjacket. If tensions escalate, the next logical step would be to make the implicit promise of support more explicit. Watch the EU summit in Brussels on 11 February and the gathering of finance ministers (Ecofin) on 15-16 February.

Could Europe afford a hypothetical bailout?
If really need be, we think so. Suppose hypothetically that the other 13 Eurozone countries were to take over the 2010 fiscal deficit of Greece, Portugal and Spain. We calculate that these 13 would then have a de facto deficit of 8% of their GDP in 2010, below the projected 10% for the US and 11% for the UK. For some scenarios, see Greece - What If?, 26 January,2010.

How bad is the economic damage?
Probably little damage so far, in our view. Leading economic indicators in January were positive. If the turbulences fade within a month or two, we believe the impact would likely be minimal. In an unlikely worst-case scenario, that is if the turmoil were to escalate for, say, more than two more months, the ensuing fall in confidence could potentially postpone the expected rebound in business investment from early to mid-2010.