IIF: “The era of European solidarity is over”

The Institute for International Finance (IIF) has released its latest analysis of the Eurozone. Published on March 26, it reflects the thoughts of the largest banking industry association, and depicts a decidedly mixed picture of the world’s second largest economy.

Spain has made an “impressive” fiscal adjustment, given that “adjusting for cyclical effects, one-offs, and net interest payments, the underlying fiscal stance” was tightened by a 3 percent of the GDP; Italy has made great progress in structural reform; and Ireland is “on track to restore full market access”.  However, the underlying tone of the survey is of pessimism.

The IIF still believes that the Eurozone will go back to growth in 2014, but admittedly so, “slower than initially expected”. The worsening economic conditions in Spain and Portugal make totally unattainable the fiscal targets for both countries, no matter what they do, and must be revised.

According to its forecasts, Germany is now entering into positive growth territory; France will achieve it during the summer; Spain, in the fourth quarter; and Italy in 2014.  Even those meager achievements are, at close examination, questionable. For instance, since the IIF predicts a GDP fall of 2 percent for this year in Spain, the recovery in the fourth quarter would have to be extremely strong, to the point that Spain’s economic activity one year from now could be on par to Germany’s (1 percent seasonally adjusted quarter-on-quarter growth).  That is a highly improbable outcome in an economy that right now is falling, for its second quarter in a row, by a 3 percent, according to the Institute.

But, beyond that, there is the background of Cyprus. The document is titled ‘The Post-Solidarity Era’, and it clearly states that, no matter what European leaders say, “investors would be well advised to see the outcome of Cyprus both as a reflection of how future stresses will be handled (support sovereign creditors, haircut bank creditors), and a reminder that efforts to shift the liabilities associated with legacy bad bank assets in both Spain and Ireland on to the ESM balance sheet are unlikely to be successful”.  That, in turn, will increase the exposure of the peripheral banks to their respective sovereigns, and increase the funding difficulties of the financial institutions in the crisis-stricken countries.