Risks Mount As Elevated: Greece, Portugal, Spain...The Eurozone as a Global Actor...Confidence that

The Eurozone debt crisis refers to the deficits built up by the European economies owing to the excessive spending and insufficient tax revenue...The crisis has adversely impacted the normal functioning of some European territories and led to protective measures such as tax increases, subsidy limits and reductions in healthcare spending...

The sovereign debt crisis currently being witnessed by the majority of European nations is the result of the unsustainable levels of government debt gathered by some of the Eurozone governments...Excessive spending and insufficient generation of revenue have led these nations towards bankruptcy, and the crisis has left the International Monetary Fund (IMF) no other choice but to provide loans in order to avoid having these economies default on their debt...

Portugal, Italy, Ireland, Greece and Spain are the Eurozone economies that have most been affected by the crisis...Greece, the epicentre of the Eurozone sovereign debt crisis, has the highest levels of public debt in the Eurozone...The European territories have put into effect various austerity measures including increase of taxes, cut in public wages and salaries and reduction in subsidies...Some of the European nations received bailout packages besides employing austerity measures in order to balance the budget...

Austerity programmes pursued by governments to put in order their finances and actions to "heal" the balance sheets of the banking sector have weighed on purchasing power and liquidity in the southern economies...As a result domestic demand decline rapidly and an extended economic stagnation has now emerged...However, in Greece it is even worse...Employment losses have been significant and unemployment rates range from 12.2 per cent in Italy to over 26 per cent in Spain and Greece with Portugal at 16.5 per cent...The economic slump has revealed the unbalanced growth pattern in these countries and major structural problems...The economic woes are intensified by being a member of a monetary union which would not engage in money printing but will force these countries to pursue internal reforms in order to address various structural problems that have made them wasteful and uncompetitive...

The first risk to these economies is the future of the Eurozone as a monetary union and its existence...The danger of a Eurozone survival is utmost...An Armageddon situation for the Eurozone, that of a total implosion or a partial break up with the southern economies exiting the union, constitutes the ultimate uncertainty for these countries. The post exit situation and therefore the return to national currencies will cause considerable diorder to these economies and lead to a virulent economic cycle for several years...Depreciation (that is argued by many to be the tool to save these countries) will not work because imported inflation will be uncontrolled...The instability of the bond markets and rises in the cost of borrowing indicates the susceptibilities of these economies as members of the monetary union in the eyes of investors. Confidence that exiting is not an option is a first step towards restoring confidence...

The second consideration involves the economic outlook for these economies...Will they be able to restore economic growth that is balanced and sustainable? Growth should not be driven by debt but it should be accompanied by an efficient economy... Structural reforms relating to welfare state, labour markets and many other aspects of the economy should be ongoing...These economies need to be more productive through falling unit labour costs and by establishing an environment that is more business friendly... Employment growth is also required; a recovery associated with job growth is more convincing...The investor’s target of returns is important. All above factors will determine risk premia, an important component of target rates of return. Risk premia applied to investments in peripheral markets will not be forbidding in a climate of subdued bond market instability and lower economic risks...Finally, the investment style will play a role with opportunistic and debt/opportunistic funds being first to move the investment market...

The economic outlook for the southern member states represented by current forecasts is one of slow growth in the medium term. With on-going structural reforms these economies are tied to show weak expansion but eventually becoming more competitive promoting their ability to generate jobs...Corporates and investors would need reassurance that the southern economies will be able to survive in the fixed exchange environment of the monetary union. Investors will be paying attention to economic and other developments in these economies and the risks surrounding the economic outlook...Progress on reforms will be closely observed. Sovereign debt levels, banking sector balance sheets and unit labour costs will be some of the macroeconomic statistics that will remain under the public focus and interest...

In a slowly stabilising macroeconomic environment, price corrections that have occurred could lever activity both in the leasing and investment markets. Adjusting prices could offer investors who are on a “risk on” mode opportunity for capital profits. Further, yield spreads between the struggling and the safer markets can satisfy the “search for yield” strategy...However, a premium will persist to reflect the need to implement the necessary structural reforms...This is important as markets will see it a requirement in order to turn away similar crises in the future and ensure survival within the monetary union...Risk premia will reflect the improvement of structural reforms. Under the scenario of successfully putting into effect structural reforms, risk premia will eventually reflect cyclical market risks and not structural risks. Moreover, when this stage is reached the southern markets will not be put in the same risk basket and interdependencies will decrease. Investors will now be considering the various contributions of exposure to these markets. Normality has returned but the time frame is not brief...