Eurozone bailout fails to tackle underlying debt issue, says Pimco’s Andrew Bosomworth
The latest eurozone bailout package was welcome – but it will fail to address the underlying debt problem, says Andrew Bosomworth, head of Pimco portfolio management in Germany
Buy the rescue rumor, sell the announcement. Following this simple strategy throughout Europe’s debt crisis has been popular with the fleet-footed. First risk assets sell off.
Then they rally on expectations of a comprehensive solution, the announcement comes, markets conclude it is insufficient and within weeks they sell off again, engulfing more victims in their wake. This piecemeal strategy by the eurozone’s leaders, one reactive policy slice at a time, is backfiring.
Instead of crowding in the private sector, capital flight is accelerating from periphery countries, banks exposed to them are shut out of funding markets and Europe’s problems have infected risk premia globally.
Greece’s economy is shrinking under the burden of fiscal tightening, causing it to miss fiscal targets and highlighting the impossibility of both saving and growing out of a debt overhang without exchange rate flexibility.
As contagion spreads, markets care less about the size of Greece’s haircut and more about whether Spain, Italy and the French banking system are solvent. Italy and Spain’s governments need to raise some €325bn next year and Europe’s banks need two-thirds as much again to reach a 9% core tier 1 capital ratio, sums that will quickly exhaust the European Financial Stability Facility’s (EFSF) lending capacity.
The rally in risk assets in October reflects expectations for yet another comprehensive solution, triggered by José Manuel Barroso’s “road map to stability and growth” announced on 12 October.
So far, it appears that the measures will fail to address the root causes of the eurozone’s sovereign debt problems.
The crisis is revealing the eurozone’s original design flaws. Spain’s problems are not that much different from the United Kingdom’s (UK), yet Spanish sovereign debt yields double that of UK debt.