A Look Around the Eurozone

While the US hunkered down for Hurricane Sandy, Europe was plenty busy.

US markets were closed as “Frankenstorm” (or Frankenstorm’s monster, if we’re being technical) battered the East Coast on Monday, but Europe did its best to fill the news void. Here’s a brief survey of the more noteworthy developments.

A German magazine leaked preliminary findings from the IMF/ECB/European Commission “troika’s” upcoming Greek progress report, calling it “almost certain” Greece receives its €31.5 billion aid tranche and two extra years to meet bailout terms—but at a cost of €30 to €40 billion in additional aid. It’s not a perfect report though—reform progress seems slower than the troika would like, so creditors are poised to order 150 more fiscal and economic reforms, including the labor market reforms the government’s junior coalition partners have thus far resisted. The Greek government’s under pressure to include many of these in this week’s anticipated 2013 budget announcement, so an intense few days of politicking seem likely.

The leaked report included another interesting tidbit: It seems the troika suggested Greece’s “official sector” creditors—other eurozone governments and the ECB—write off some of their Greek debt holdings. Many EU officials have already dismissed the suggestion though. German Chancellor Angela Merkel’s spokesman called it “out of the question,” and the ECB reportedly said taking a haircut would violate its charter. Yet the ECB’s still willing to forgo profits on Greek debt it’s purchased below market value, and Merkel’s spokesman also suggested Greece could buy back debt below face value. So Greece probably gets something of a break from official sector creditors, even without a formal haircut.

Meanwhile, in the Netherlands, the top two vote-winning parties in last month’s election agreed to form a government. The pro-euro Liberal and Labor parties will join forces, with Liberal Party leader and current Prime Minister Mark Rutte likely remaining at the helm. Rutte and Sansom also reached a budget deal, settling the impasse that led to the last government’s fall in April. The plan aims to trim €16 billion from the deficit by 2017 by cutting health care and social security spending and ending some tax credits, and party leaders agreed to raise the retirement age and reform unemployment benefits and labor markets. Some of these measures may prove tough on Dutch citizens, but having a government willing to comply with Brussels’ deficit targets (and continue supporting the periphery) should help further shore up investor confidence in the euro.

Elsewhere on the political front, things were a bit muddier. In Italy, former Prime Minister (and convicted tax evader) Silvio Berlusconi threatened to pull his People of Freedom (PdL) party’s support for current Prime Minister Mario Monti, which would trigger early elections (currently due by early 2013). Most likely, this is just blustering. Recall, Berlusconi had hinted he’d run again on an anti-euro platform, but days before his conviction he U-turned, saying he had no intention of running and more or less endorsing Monti. Plus, current PdL Leader Fabrizio Cicchitto is the primary decision maker, and he reiterated his support for Monti’s government on Monday. It’s difficult to envision Berlusconi’s latest rant materially changing things.

Finally, Spain received hearty praise from the IMF on its efforts to reform its troubled financial sector. According to the IMF’s report, Spain’s met deadlines, outlined a credible plan for restructuring the sector and developed a better regulatory framework. Some banks still have capital shortfalls, but this should be addressed once Spain begins receiving money from the previously agreed bank rescue package. In our view, Spain’s progress is more telling than economic data released this week, which likely show continued weakness—it should earn Spain more support from eurozone partners, giving leaders the necessary time to continue implementing economic reforms, regain competitiveness and ultimately resume growing.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.