How the eu­ro­zone sur­vived

Financial Mirror (Cyprus) - - FRONT PAGE -

The Greek cri­sis has strained nerves on the eu­ro­zone debt mar­ket, but un­like four years ago there has been no con­ta­gion of fi­nan­cial un­cer­tainty across the sin­gle cur­rency bloc, ac­cord­ing to EurAc­

The chaotic na­ture of the bailout ne­go­ti­a­tions which nearly sent Greece into de­fault ex­ac­er­bated mar­ket volatil­ity, but the rise in yields was largely con­fined to Greek bonds.

While in 2011 Greece’s prob­lems rip­pled across the eu­ro­zone as spooked in­vestors de­manded higher re­turns from other coun­tries that in turn pushed them into fi­nan­cial trou­ble, this time yields barely budged.

This year “there was pol­lu­tion, but not con­ta­gion” to other eu­ro­zone coun­tries, said Pa­trick Jacq, a debt mar­ket spe­cial­ist at French bank BNP Paribas.

“There was no con­ta­gion, that is the big dif­fer­ence with three or four years ago,” said Fred­eric Gabi­zon, who heads up bond mar­kets at HSBC.

In a sort of self-ful­fill­ing prophecy four years ago, in­vestors wor­ried about the sus­tain­abil­ity of the debt of weak eu­ro­zone na­tions de­manded higher re­turns. This weak­ened the fi­nances of those coun­tries.

Por­tu­gal ended up need­ing to take a full EU-IMF bailout in 2011, while Spain got away with just a bailout of its banks in 2012.

This year, even at the most dif­fi­cult mo­ments in the ne­go­ti­a­tions be­tween Greece and its cred­i­tors, “there weren’t mas­sive move­ments to sell the bonds” of Spain or Italy, said Gabi­zon.

Bond mar­ket spe­cial­ist in­vest­ment bank Natixis said dif­fer­ent” this year.

He cited as an ex­am­ple the rate of re­turn to in­vestors on 10- year Por­tugese sov­er­eign bonds, which shot up to 18% at the be­gin­ning of 2012, but only rose to 3% this time.

The first bond emis­sion by the Euro­pean Union af­ter Athens and the eu­ro­zone na­tions agreed on a third bailout to Greece worth up to EUR 86 bln, demon­strated the con­fi­dence of in­vestors, said Gabi­zon, who led the op­er­a­tion.

“In just one hour and 15 min­utes it gen­er­ated de­mand of EUR 1.8 bln, or three times the 600 mln the EU wanted to bor­row for five years, for a bor­row­ing rate of 0.272%, a real Jean-Fran­cois Robin at the “the mag­ni­tude is com­pletely suc­cess,” he said.

The re­ac­tion by mar­kets this time around demon­strated the sit­u­a­tion had changed sig­nif­i­cantly since 2011.

“The eu­ro­zone is bet­ter or­gan­ised, and mem­ber states are also in a dif­fer­ent shape. Por­tu­gal and Spain have un­der­taken con­sid­er­able re­forms,” said Robin, adding that eco­nomic growth has also re­sumed.

“Above all, the Euro­pean Cen­tral Bank is out there buy­ing bonds ev­ery day,” added Robin, re­fer­ring to the quan­ti­ta­tive eas­ing (QE) pro­gramme launched in March, un­der which the ECB pur­chases around EUR 60 bln of debt of eu­ro­zone mem­ber coun­tries and com­pa­nies.

The pro­gramme pro­vides pow­er­ful sup­port to bond mar­kets and keeps in­ter­est rates low. But even that didn’t pre­vent an up­ward swing in the sec­ond quar­ter of the year.

In the first quar­ter, gal­vanised by the ECB’s an­nounce­ment of its QE pro­gramme, sov­er­eign yields dropped, in some cases into neg­a­tive ter­ri­tory, as in­vestors sought a safe haven in­vest­ment amid fears of re­ces­sion and de­fla­tion.

“(But) the sec­ond quar­ter was very tu­mul­tuous,” said

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