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Markets have been buoyed by cheap cash and positive U.S. economic data recently, and Europe has been confident since Greece finally secured its second bailout. Thus investors have shifted their immediate focus back to oil prices and economic policy.But while Europe may look a lot healthier now that banks have plenty of capital and Greece is no longer on the verge of collapse, this doesn’t mean the eurozone is any closer to actually solving its problems.
The biggest issue right now remains the size of the European bailout funds–the European Financial Stability Facility and the European Stability Mechanism. While leaders agreed to move up the implementation of the latter from next year to this summer, Germany has in the past opposed measures to run both funds simultaneously. Recently, German leadership has appeared to have given ground on this issue, it is unlikely to support any measures to increase the availability of bailout funds significantly.
Here is a quick look at what’s been going on in the eurozone’s most troubled economies in the past week, and what this means for the future of the European economy:
The Portuguese government is no doubt happy to be out of the limelight while economic contraction threatens its efforts to cut back debts. According to the Financial Post, €31 billion ($40.8 billion) in corporate debt falls due this year, and companies struggling to stay afloat in the economic decline will be hard-pressed not to default on their debts. Citi estimates that GDP will contract -5.7%, versus Portugal’s own estimates of just -3.3%.
This week, former ECB member Lorenzo Bini-Smaghi said that EU leaders need to allocate funds to support Portugal immediately, since the country is likely not to meet its funding needs of €100 billion by 2016. Bini-Smaghi stressed that this second bailout would need to be talked about immediately so as to avert a liquidity crisis when confidence fades. While yields on its government bonds are no longer over 20%, Portuguese debt is still trading at distressed levels.
With Greece’s second bailout finally in place, investors are looking ahead to the country’s next round of national elections, which will probably topple the technocratic leadership of Lucas Papademos–the country’s interim leader since early November. Current finance minister Evangelos Venizelos is expected to tender his resignation Monday to start gearing up for the elections as PASOK’s candidate.
On a brighter note, this week both the IMF and the European Commission agreed to pay out the funds Greece has been awarded as part of its second bailout. Greek newspaper Kathimerini reports that the first $7.8 billion of those funds will be paid out Monday.
Regarded as the strongest of the bailed out economies in the eurozone, Ireland still awaits a referendum on the “fiscal compact” that EU leaders agreed on back in December. The fact that Greece no longer has to pay back completely the debts it owed the ECB have led Irish leaders to continue pushing for better terms to their own bailout deal–lower interest rates with longer maturities on current loans.
Negotiations with EU leaders on this point are still ongoing, but doubts are beginning to mount about whether Ireland will be able to successfully change the terms of their loans this month.
Mario Monti’s technocrat government is working to push through yet another round of economic reforms in an attempt to get the country’s fiscal house in order, this time negotiating with business and union leaders. It is expected to an unveil a new agreement with them by the end of the month, and perhaps even as soon as next week.
labour market reform has been a paramount concern of Monti’s as restrictions on hiring and firing practices are incredibly strict. His government’s commitment to reforms has generated renewed confidence in Italy, and yields on Italian bonds have sunk below 5% and below the yields on Spanish bonds, suggesting investor belief in the fact that risks from Italy have been materially minimized in the last few months.
Spain is once again in the hot seat compared with Italy, with yields on 10 year bonds rising back above those of its counterpart and above 5%. Its public debt hit a new high at 68.5% of GDP, according to WSJ, and EU finance ministers agreed with Spanish Prime Minister Mariano Rajoy that Spain would not be able to meet its budget deficit goal for the year, raising expectations for that from 4.4% to 5.8%.
Meanwhile, the country is seeing little recovery from a housing bubble and high unemployment. On Thursday, Spain’s statistics agency announced that home prices had fallen at an annual rate of 11.2% in the last year and 9.6% in the quarter.