UBS’s Guide To The Most Troubled Countries In The Eurozone (EZU)

By admin on June 27, 2012

Euro symbol

In the absence of a political and fiscal union Europe’s sovereign debt crisis continues to be a huge issue for financial markets, even as policymakers head to the European Council meeting later this week.

In a new note, UBS analyst Thomas Wacker and his team give us their update view of the European debt crisis focusing on Greece, Italy, Ireland, Portugal and Spain.

We drew on UBS’ report to highlight key issues on debt sustainability, economic outlook, and the next steps for the PIIGS economies.

Greek debt is beyond sustainable levels and exit risk will return later this year or in early 2013

Debt sustainability: Greek debt is beyond sustainable levels and the country needs more haircuts on its debt. For debt sustainability the country needs a 70 percent haircut on its current debt. “We expect another event of default later in 2012 or early in 2013 as part of a series of restructuring events.”

Economic outlook: UBS analysts expect a recession for a fifth straight year in 2012 and the outlook is hugely dependent on policy and therefore uncertain. “The delay in the implementation of the conditions of the second bailout plan will likely lead to a back loaded austerity profile, and poses considerable downside risk to the 2013 UBS real GDP forecast of 0.7%.”

Next steps: The New Democracy-PASOK coalition should agree on a modified plan with the Troika to open up the second bailout plan. Exit risk is likely to return later this year, or in early 2013 since the Troika will want more reform measures.

Source: UBS

Ireland’s economy is projected to grow 2% next year and eyes are on its return to debt markets

Debt sustainability: There are signs of stabilization and only a moderate probability of default. The debt to GDP ratio could stabilize at 115% by 2013. A key test will be the nations return to the bond market with bills this year, and bonds in 2013.

Economic outlook: Since Ireland’s economy is heavily dependent on exports, its direction will depend on the changes in the Eurozone economy. UBS analysts project 2 percent growth in 2013 but warn that lack of macro stability in Europe is a major risk to this forecast.

Next steps: Ireland should resume issuing bills in the fall and for the most part meet its consolidation (reducing fiscal debt) targets. Contagion risk from Greece is less pronounced for Ireland than for Spain, Portugal, and Italy.

Source: UBS

Italy is unlikely to default on its debt next year and should grow 0.2% in 2013

Debt sustainability: Italy is not expected to default on its debt in the next five years. Its debt ratio should stabilize to 120 percent of GDP. But debt could balloon if austerity measures enacted by Monti’s government are abandoned.

Economic outlook: The economy is expected to contract 1.8 percent this year. This will be a transition year with 2013 only likely to see 0.2 percent growth given the austerity and weak external demand. But UBS analysts are more optimistic on Italy that Spain because of its strong private-sector balance sheet and low bank loan-to-deposit ratio.

Next steps: Italy isn’t expected to ask for a bailout. “Trigger points for renewed pressure on Italy include a move away from its consolidation program, perhaps triggered by the Monti government losing power, and a possible Greek exit from the euro, which may lead to a deposit flight also in Italy.”

Source: UBS

See the rest of the story at Business Insider

Please follow Money Game on Twitter and Facebook.