National Bank of Greece ADR (fka NBGGY)

[Jester_Vandalay]

No new year joy for Europe

It’s been a sombre year-end for the eurozone, with major European sharemarkets losing ground on their last full trading day for the year at the same time that the cost of insuring European sovereign debt is close to an all-time high.

The iTraxx SovX Western Europe index, which allows investors to take out default protection on a basket of 15 sovereign borrowers, has been climbing since mid-October when worries about the finances of the debt-laden eurozone countries resurfaced.

Already, the eurozone sovereign debt crisis claimed Greece and Ireland as its victims this year, with both countries being forced to request emergency funding from the European Union and the IMF.

But investors are worried that the sovereign debt crisis looks set to roll on into 2011, and that Portugal, which is battling anemic growth and a heavy dependence on external funding, will be the next eurozone country to succumb.

Overnight, Portugal’s Minister of the Presidency, Pedro Silva Pereira, tried to allay these fears, saying that the country planned to shore up its finances by cutting government debt.

"We are confident in the capacity of the Portuguese economy to confront the current situation," he told reporters in Lisbon.

Portugal has already announced a series of austerity measures, including cuts in public sector wages, and tax hikes in order to cut its budget deficit to 4.6 per cent of GDP in 2011, compared with an estimated 7.3 per cent this year.

But Pereira also noted that the sovereign debt crisis was not unique to Portugal, but affected the entire eurozone. As a result, he said, a solution was needed at the European level.

There are worries that the eurozone sovereign debt crisis could flare up early next year, as a number of countries rush to capital markets in January in the hope of getting their borrowing programs off to a good start.

Some bankers estimate that eurozone countries could be looking to borrow up to €80 billion in January. In addition, the European Union will be looking to raise a further €10 billion for its bailout fund to cover the cost of rescuing Ireland.

This represents more than 10 per cent of the €800 billion in bonds that eurozone countries are expected to issue next year in order to finance government budget deficits and to refinance maturing debt.

A heavy rash of bond issues in January could put intolerable pressure on fragile European financial markets. Already, many investors are refusing to buy the bonds of those eurozone countries which as seen to be particularly vulnerable.

As a result, the borrowing costs of countries such as Portugal have soared, putting further pressure on government finances. In recent weeks, yields on 10-year Portuguese bonds have climbed above 7 per cent, which has further fuelled speculation that Lisbon will be the next eurozone country to put its hand up for a bailout.

In the wake of the Irish crisis, the European Central Bank – which had been hoping to wind back its purchases of eurozone bonds – has had to step into the market and buy the bonds of countries such as Ireland, Greece and Portugal in order to stop their interest rates from spiraling out of control.

But many fear that the ECB will be deeply reluctant to continue loading up its balance sheet with bonds of suspect quality, particularly if there is no sign that European politicians are committed to resolving the sovereign debt crisis.


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