Europe has been "stuck in the muddle" for the last two years, but despite growth concerns, a 2008-style collapse in global output remains very unlikely, according to Hetal Mehta, economist at Legal & General.
Europe has been “stuck in the muddle” for the last two years, but despite growth concerns, a 2008-style collapse in global output remains very unlikely, according to Hetal Mehta, economist at Legal & General.
Speaking in London today, Mehta said that while the debt crisis of the euro area remains a major concern for markets, current global economic conditions are better than 2008.
“The year was notable for high and rising interest rates, tight credit conditions, oil at $150 and collapsing world trade. Those conditions just don’t exist today,” she said.
The same reasoning applies to Spain and Italy, two of the most vulnerable countries in the current crisis after Greece.
Legal & General attributes a 25% probability to a Greek exit from the eurozone.
“Spain is often spoken as the next Greece, but this isn’t the case. While Spain’s public debt is rising and the economy undergoes a recession, at least the private sector is no longer borrowing. By next year we expect exports to exceed imports and external interest payments, which effectively means that Spain becomes self-financing. Greece is a long way from that,” Mehta said.
The country is expected to post GDP growth below 1% until 2020, and as austerity measures in the country kick in, the government should make sure the economy will not stuck “in a hamster wheel of low growth”.
Along with Spain but to a lesser extent, Italy has also been in the line of fire.
“Italy’s government debt is at 120% of GDP and is the key cause for concern. While Italy is most vulnerable to an interest rate shock, its key advantage is that its total external debt both public and private is around 35% of GDP, against 90% for Spain and 110% for Greece,” she said.
Despite a mildly positive attitude, the economist added that given the current market outlook sovereign rating downgrades will be likely to be announced over the next 12 months.
“We believe that Spain will be downgraded by three notchs to BBB-, just above the investment grade, while France and Italy are at risk of one or two-notch downgrades,” she said.
Finally, the UK is predicted to lose its AAA rating by the end of the year.