The euro came under pressure yesterday after a report on CNBC suggested that Spain has just as many problems as Greece. Whilst not exactly a ‘bolt from the blue’, it underlines the long road ahead for the euro zone before it can safely say that the euro zone sovereign debt crisis is behind them. After all, it is one thing for Greece, the smallest economy to be bailed out but quite another for Spain, the fourth largest euro zone economy to require assistance.
At a meeting of euro zone finance ministers, the disagreement between Spain and the rest of the euro zone over its budget deficits came to light and shows no sign of a resolution after euro zone finance ministers called on Spain to revise its budget plans.
The dispute is quickly becoming a test of the euro zone’s ability to impose targets on individual countries. Less than two weeks ago, newly elected Spanish Prime Minister Mariano Rajoy flouted Brussels-imposed budget deficit targets of 4.4% of GDP this year. He stated that the new target for Spain would be 5.8%. This contrasts sharply that the Eurogroup of euro zone finance ministers said Monday that the country’s target would now be 5.3%. The group said in a statement “The timely correction of the excessive deficit should be ensured by an additional frontloaded effort of the order of 0.5 percent of GDP, beyond what has already been announced by the Spanish authorities so far, and by an early adoption and strict implementation of the new mechanisms in the Budget Stability Law on the monitoring and control of budget compliance at different levels of government. The Spanish government expressed its readiness to consider this in the further budgetary process.”
In contrast, data from the German economic index compiled by the ZEW survey rose in March to its highest level since June 2010. The index rose to 22.3 from 5.4 in February compared to the consensus estimate of 10. This positive reading saw risk sentiment improve and drove worldwide stock markets higher with the S&P500 in New York hitting a post 2008 high.
Citi strategist for Spain Jose Luis Martinez Campuzano points out that the survey is realised among financial analysts, who may have been influenced by recent momentum in the markets. He says that the report reflects the view that growth will not be hindered by domestic demand weakness.
“Analysts do not expect ECB rate cuts in coming months and are increasingly optimistic about euro members, even beyond Germany. Is the worst over for the European financial sector after Greece’s default? Analysts believe it is.”
The Federal Open Market Committee (FOMC) reported last night and advised that it would maintain the exceptionally low US interest rates currently in place until the end of 2014 because the unemployment rate remains at high levels, economic growth in coming quarters will be moderate and there are still significant risks to current economic forecasts.
The pound found support after a home price survey by the Royal Institution of Chartered Surveyors rose by 3 to -13, a 19-month high.
Reports out this morning suggest that Greece may have already slipped behind the agreed schedule of debt reduction for 2013-2014 that helped it qualify for the €130 billion bailout last month.
The markets remain unconvinced about the viability of the Greek sovereign debt, as the price, yields and spreads of the new bonds indicate. The statistics clearly show that the possibility of a default is still looming.
Meanwhile, Greek politicians are doing their best to talk up the situation with Evangelos Venizelos, minister of finance, said the country is in the middle of a dynamic comeback. “The pre-election period should not disrupt the implementation of our fiscal programme. Also, the first 100 days are crucial for the new government, as this should be a period of a comeback, so that we don’t miss this huge opportunity that arose with the reduction of the sovereign debt,” Mr Venizelos said.
The task force has already got down to work in a bid to accelerate the restructuring of the Greek economy. The focus is to provide €6 billion to small- and medium-sized enterprises and to then move on with large development plans within the following two months. The first billion euro instalment of the €6 billion liquidity plan is not expected until Easter. Horst Reichenbach, head of the task force, stated that he is expecting Greece to return to the markets by 2015.