Despite the formation of a new government in Greece—determined to renegotiate the terms of its bailout—and a rescue for the banking sector in Spain, it looks as if a long hot summer is in store for the eurozone as financial conditions continue to worsen.
Thursday saw continued contraction in the private sector; Spain and Italy were the subjects of a dire prediction; and in the U.K. the government planned to give shareholders greater say over executive compensation.
Reuters reported Thursday that Greece said it would ask for an additional two years to meet fiscal targets specified in its bailout, and its new government said an extension of unemployment benefits was another key element in its policy. In response to a surge in public pressure and the promise of additional pressure from second-place party Syriza, the pro-bailout parties that make up the new coalition government agreed to a number of changes softening the terms of the bailout and would seek approval for them from eurozone partners.
If there were hints of a breather for Greece, however, eurozone news remained grim. The June Flash Composite Markit Purchasing Managers’ Index indicated a fifth straight month of contraction, with the private sector pulling in its belt at the fastest pace since June 2009.
While a combination index of the services and manufacturing sectors did better than expected by economists polled by Reuters, it still fell to 46, remaining below the 50 mark that is the divider between growth and contraction. It has been below 50 in all but one of the last 10 months.
Howard Archer at IHS Global Insight said in the report of the numbers, “The only remotely positive spin that can be put on the dismal eurozone [PMI] is that there was no further deepening in the overall rate of contraction. Hardly a cause for celebration.” Even China suffered, with its factory sector contracting for the eighth straight month in June.
The gloom spread in a prediction by Jamie Stuttard, head of international bond portfolio management at Fidelity in London, who forecast in a Bloomberg report the need for sovereign bailouts for both Spain and Italy within the next 12 months. The result, he said, would shake the global economy.
Between them the two countries carry have 2.8 trillion euros ($3.6 trillion) in sovereign debt, which is four times the debt carried by Greece, Ireland and Portugal and enough to threaten the crisis mechanisms of Europe. In the report, Stuttard said, “We are onto the big countries now. A rescue for Italy is pretty much impossible without a major change in German borrowing costs, a major change in overall eurozone levels of inflation, a major change in the level of the euro, or a major change in the structure of the eurozone.” Together the two countries would have to come up with about a trillion euros in principal and interest payments through 2014. That’s double the amount European governments have set as the limit for additional rescue lending for the permanent bailout mechanism, set to come online in July— a maximum of 500 billion euros—after already promising 300 billion euros to Greece, Ireland and Portugal. On Thursday, Spain’s borrowing costs continued to rise, topping 6% and reaching a 15-year high.
“This is the biggest crisis with which the IMF has ever had to deal,” Professor Simon Johnson, of the Massachusetts Institute of Technology, said in the report. Johnson, a former IMF chief economist, added, “It’s the entire eurozone that is now in crisis—about a quarter of the world economy.”