NEW YORK, July 19: Just two months ago, Europe’s sovereign debt problems seemed grave enough to imperil the global economic recovery. Now, at least some investors are treating it as the crisis that wasn’t.
Spain held an auction of 15-year bonds last week that went off without a hitch, raising 3 billion euros, or about $3.8 billion, at a relatively favourable interest rate of 5.116 percent. That was up from 4.43 per cent on a debt sale in late April, though the latest one was far more heavily subscribed.
Also last week, Moody’s Investors Service downgraded Portugal’s credit by two notches, citing the nation’s debt burden and poor growth prospects, a sign that the country’s underlying problems are not over. Yet investors, rather than punish assets linked to Portugal’s economy, seemed to take the news in stride.
Nations such as Spain, Portugal and Greece had been cautious about holding big debt auctions as recently as last spring. Then, weak demand would almost certainly rattle global markets on fears that European nations would have trouble raising new money to cover their groaning debts. Investors were quick to sell on the mere hint of a credit downgrade.
How quickly investor psychology has changed. “Europe has had a pretty good crisis,” said Mr Jacob Funk Kirkegaard, a fellow at the Peterson Institute for International Economics in Washington.
“In the short term, it made a number of very constructive decisions that had the effect of calming down the markets or shifting market attention elsewhere.”
Indeed, there has been a string of calming news of late: well-subscribed bond auctions in Portugal and Italy, a deal to freeze wages in Greece as it tries to rein in its public spending, and signs that German industry, so
important for the rest of Europe, is growing more strongly than expected, according to data for May.
Europe has also had help from an unexpected quarter: signs of renewed weakness in the American economy.
Two months ago, Europe’s plight contrasted with the faster-growing United States, which seemed to be pulling quickly toward economic expansion after a period of recession. Since then, however, economic data has pointed to an unexpected slowdown in growth, and unemployment remains stubbornly high.
As the effects of the public sector stimulus wear off and few new jobs are created in the private sector, some officials within the Federal Reserve have begun voicing concerns about deflation, and last week the Fed revised down its growth forecast for this year to a range of 3 to 3.5 percent, from its 3.2 per cent to 3.7 per cent forecast in April. Suddenly, Europe seems more stable to many investors than the United States, where there has been talk of a double-dip recession.