World Risk Developments February 2010: tensions rise in world economic outlook
This month’s issue of EFIC’s newsletter, World Risk Developments, discusses an interesting tension that has arisen in the world economic outlook. Many leading and coincident indicators of national and by extension world economic activity are delivering moderately pleasant surprises, prompting forecasters to upgrade their guesstimates of growth for 2010 and 2011. Yet at the same time, doubts about the ability of Greece, and to a lesser extent Portugal, Spain and Ireland, to finance their large budget deficits and public debts is casting a pall over the eurozone outlook, and again by extension the world outlook.
The newsletter notes that the latest prominent forecaster to revise up its numbers is the International Monetary Fund (IMF). It is now forecasting world GDP growth of 3.9% in 2010, up three-quarters of a percentage point from its October forecast. ‘Meanwhile, and astonishingly, however, sovereign CDS spreads for Greece have become larger than those for Russia, the Philippines and Indonesia’, says EFIC’s chief economist Roger Donnelly.
‘A sharp sell-off of Greek bonds immediately after an initially successful eight billion euro bond sale in late January has dealt a large blow to market sentiment and is increasing the chances that future debt auctions will fail and Athens will be forced to seek finance from fellow eurozone states or the IMF’, Donnelly adds. ‘Such help will probably be forthcoming, despite the statements of some EU politicians and officials recently that there will be no bailout. This is probably a gambit to put pressure on Athens to get serious about budget balancing. In the final analysis, other eurozone governments would probably baulk at seeing Greece default, because that would mean, first, further large losses for European banks with Greek exposures, and second, contagion to the other troubled eurozone governments.’
Still, any need for a bailout could unnerve financial markets and lead to renewed risk aversion, which would dampen confidence and ripple through to funding costs for a wide spectrum of borrowers in world capital and banking markets. Thus, the Greek difficulties could represent a renewed drag on world growth. That is the broader significance of Greece, Donnelly says.
In other stories, the newsletter looks at overheating concerns in Vietnam, credit upgrades and oil price vulnerability in Indonesia, credit upgrades and economic resilience in Turkey, and the post-election outlook for Sri Lanka.