24th November 2010

Schroders: Another one bites the dust

Jamie Stuttard, Head of European and UK Fixed Income.

Jamie discusses the eurozone periphery following Ireland's bailout

• While Ireland follows Greece in appealing to the European Union and IMF for aid, there are some important differences. Greece was not transparent; Greece did not have a Aaa rating; Greece had far more than three times as much debt to GDP relative to Ireland (and that's if you believe the Greek government statistics produced in 2007 and 2008); Greece refused to admit there was a problem until comparatively recently; and Greek debt issuance was increasing.
• With two countries now in the hands of the IMF and European Union aid, the eurozone still has multiple challenges to deal in its maturation process and as it continues to face the first major test in its youthful history.
• Unlike the bailout for Greece, there has been no additional policy announced by the eurozone authorities to stop the potential for the spread of contagion to Portugal, Spain or other eurozone countries. It is clear where the focus will be next.
• With over USD5 trillion of government debt that requires issuance in 2011 to meet coupons, redemptions and anticipated budget deficits (let alone the unanticipated ones, such as Ireland's 32% of GDP deficit this year, or Greece's now recently revised 15%+ in 2009), the primary government bond market calendar will once again be a major test for the more fundamentally challenged countries.
• The policy response to Greece and Ireland has been slow, full of mixed messages and there remains massive uncertainty as to how problems in eurozone government debt will be addressed post-2013. But the choices are clear: let individual countries restructure or share the burden more broadly among bondholders via inflationary policies. It appears that either individual market fiscal risk premia or broader inflation risk premia need to rise.

Read the article here

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