Credit Suisse said that within peripheral Europe, it is biased towards Greece, while it maintains its underweight ratings on Spain, Ireland and Portugal.
According to Credit Suisse, Greece has four relative advantages. It is further along the adjustment process, as the fiscal deficit has fallen from 15.4% in 2009 to 9.4% of GDP last year, consensus nominal GDP forecasts, unlike for the rest of peripheral Europe, do not look optimistic, the valuation of the market is clearly cheap, and there is a long-run bull story on banks, where private sector leverage remains very low, at around 110% of GDP, compared to a European average of 160%.
The package announced by the European leaders on March 12 is a step in the right direction, said Credit Suisse. The total funds now available for bailouts is EUR 812bn, equivalent to around 90% of total financing needs for Spain, Portugal, Greece and Ireland over the next three years.
It shows that European leaders realise that the cost of not bailing out peripheral Europe is greater than the cost of doing so. “Our key concerns remain: we think investors are underestimating the degree of deflation required in peripheral Europe; 40% of Greek debt and 30% of Irish government debt may have to be written off”, said Credit Suisse.
Additionally, the deleveraging of the private sector in peripheral Europe has hardly begun, “we see the risk of an overly tight policy and the package still needs to be ratified”.
“The EFSF is now big enough to be used to bail out both Portugal and Spain, if necessary, said Credit Suisse, while the lower interest rate on its bail-out loans reduces the short-term pressure on Greece.
The deal shows that the cost to core Europe of not bailing out the periphery is greater than the cost of a bailout, however any amendment to the EFSF has to be ratified by national governments.
According to Credit Suisse, Greece has four relative advantages. It is further along the adjustment process, as the fiscal deficit has fallen from 15.4% in 2009 to 9.4% of GDP last year, consensus nominal GDP forecasts, unlike for the rest of peripheral Europe, do not look optimistic, the valuation of the market is clearly cheap, and there is a long-run bull story on banks, where private sector leverage remains very low, at around 110% of GDP, compared to a European average of 160%.
The package announced by the European leaders on March 12 is a step in the right direction, said Credit Suisse. The total funds now available for bailouts is EUR 812bn, equivalent to around 90% of total financing needs for Spain, Portugal, Greece and Ireland over the next three years.
It shows that European leaders realise that the cost of not bailing out peripheral Europe is greater than the cost of doing so. “Our key concerns remain: we think investors are underestimating the degree of deflation required in peripheral Europe; 40% of Greek debt and 30% of Irish government debt may have to be written off”, said Credit Suisse.
Additionally, the deleveraging of the private sector in peripheral Europe has hardly begun, “we see the risk of an overly tight policy and the package still needs to be ratified”.
“The EFSF is now big enough to be used to bail out both Portugal and Spain, if necessary, said Credit Suisse, while the lower interest rate on its bail-out loans reduces the short-term pressure on Greece.
The deal shows that the cost to core Europe of not bailing out the periphery is greater than the cost of a bailout, however any amendment to the EFSF has to be ratified by national governments.
source: CAPITAL
