Banks and policymakers in the eurozone may be forced to deal with debt crises in Portugal and Ireland, a senior official at the group of global banks that this week agreed a E130 billion bailout package for Greece has warned.
Philip Suttle, deputy managing director of the International Institute of Finance (IIF), told Emerging Markets that Europe was in a “chronic” phase of its crisis.
His comments came as renowned economist Barry Eichengreen said the euro-zone’s economic and political future still rested on a knife edge.
Suttle, who is also the IIF’s chief economist, said the Greek bailout had steered the economy and the wider eurozone away from the “really bad scenario”.
But asked whether the deal had only postponed further rescue measures, Suttle said he expected Spain, Portugal and Ireland would come back into markets’ focus.
“All eyes are on Portugal,” he said. “Portugal is the one that really is an issue because its debt is trading at levels more consistent with Greece a year ago or six months ago.”
“That raises questions about the credibility of the idea that Portugal can return to market borrowing in 2013. If they can’t, then the market will ask how serious is this commitment to fund everyone excluding Greece ad infinitum as necessary.”
He said the issue would come down largely to the willingness of the triple-A rated northern states – including Germany and the Netherlands – to put together another rescue package for Portugal.
“If they really wanted to show their commitment they’d do it now but then you get into a problem that Portugal has more and more debt held by the public sector and you have this debt overhang problem,” he said.
Eichengreen told Emerging Markets the Greek package had failed to stem the euro-zone’s economic rot and warned that a pro-longed eurozone growth crisis spelled“social, political and financial instability” without urgent redress.
“Europe will continue to do just enough to keep the boat from sinking but no enough to keep it on an even keel,” he said. “Above all, it needs growth and a weaker euro.”
Despite the economic and political turmoil in the eurozone over the past year, the euro’s exchange has remained relatively firm, though consensus forecasts predict a weaker euro in trade-weighted terms by year-end.
Their comments contrast with the enthusiasm in the financial markets that saw stock markets notch positive gains this week, buoyed by figures showing that US jobless claims at a four-year low.
These added to the gains seen after the European Central Bank injected E1 trillion of cheap loans into the eurozone banking system.
“Europe will have to come to the realization that without economic growth, you cannot have financial or political stability,” he said.
A fiscal stimulus in Germany to boost domestic demand – and, thus, exports from peripheral Europe to northern Europe – would be the most effective measure to arrest the eurozone’s economic decline.
However, since this move would be thwarted by fiscal hawks in Germany, he said, adding that “political logic” dictated that only further expansion of the ECB’s balance sheet with large-scale purchases of financial assets and government bonds of all eurozone member states in the secondary market would engineer a growth-positive currency adjustment.