Saturday 27 May 2017

Euro rescue deal fudge to cause market meltdown

Further Irish downgrades feared

Louise McBride

Louise McBride

Europe faces the prospect of further credit rating downgrades and stock market falls if a viable deal to resolve the European debt crisis is not ironed out this week, financial experts have warned.

However, even if a deal is agreed, France, along with Ireland, Portugal, Italy and Spain could see their credit ratings slashed if Europe falls into another recession.

In a report published last Friday, the credit ratings agency Standard & Poor's warned that it could downgrade the credit ratings of France, Ireland, Portugal, Italy and Spain if Europe is hit with a double-dip recession -- and if interest rates rose sharply at the same time.

A double-dip recession is deemed increasingly likely given the sluggish economic growth in Germany, Greece, Portugal, Italy and Spain -- and the amount of money that could be needed to prop up Europe's ailing banks.

European leaders meet today and on Wednesday in a bid to approve a rescue deal for Europe's financial system. Markets could fall by as much as 10 per cent if a comprehensive solution is not found, warned Alan McQuaid, chief economist with Bloxham.

"In the absence of a deal, stock markets could, at worst, fall by between five and 10 per cent," said Mr McQuaid. "However, I think the falls will be less than five per cent. European stock markets would suffer the most followed by Asia -- given their close trading ties to Europe."

Gary Jenkins, head of fixed income with Evolution Securities, believes European leaders will come up with "some sort of statement" this week. "It would be horrendous on stock markets if they didn't," said Mr Jenkins.

One of the main pressure points between France and Germany was over expanding the European Financial Stability Facility. Parisian concerns that bolstering the fund would cause France to lose its Triple A credit rating had held up the creation of a souped-up fund.

However over the weekend it appears that French concerns have been alleviated somewhat, paving the way for a deal to create a €1.3 trillion fund. Moves to recapitalise Europe's banks and a new measure to agree haircuts of around 50 per cent on Greek bondholders are expected to be finalised in coming days.

Justin Urquhart Stewart, director and co-founder of Seven Investment Management, believes that any European deal must go beyond a bailout of the banks.

"Shoring up the banks just sorts out the short-term issues," said Mr Urquhart Stewart. "Underlying issues, such as tax harmonisation and the level of debt that countries can have, must also be dealt with. If we don't see any deal by Thursday, there will be further weaknesses and nervousness in the banks, which will lead to more illiquidity in the banks -- which is what caused the debt problems in the first place."

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