‘Idiosyncratic’ Greece must find its feet
Greece is not yet back on its feet, but sooner or later it will need to return to the markets against the backdrop of a euro-area slowdown, even though this country is an “idiosyncratic” case, PIMCO’s eurozone expert Nicola Mai tells Kathimerini English Edition.
PIMCO, one of the world’s largest investment management firms, is anticipating a year of political uncertainties and a slowdown in international growth, according to the global economic outlook it has shared with Kathimerini.
“We believe the global economy is past peak growth in the cycle, central bank support continues to be reduced and political risk looms large across countries. These trends support our relatively cautious positioning and intense focus on liquid assets, which will allow us to respond either to specific opportunities or generic spread widening and higher volatility,” the PIMCO analysts note in the firm’s Cyclical Outlook report for 2019.
The political risks include Britain’s upcoming departure from the European Union, though this is unlikely to affect the eurozone, Mai argues. “Brexit is mostly a UK issue; it is fairly marginal for the eurozone. The British market is quite large, but not large enough to shift the outlook for the eurozone,” he says.
The euro area is already on course for a slowdown, which PIMCO expects to be more obvious than other experts predict: “We expect a slowdown from close to 2 percent in 2018 to slightly above 1 percent in the eurozone this year. Further, the global trade is slowing and the outlook is weaker. Our estimates are below consensus forecast. There is also a lot of noise and distortions in Germany and the protests in France,” says Mai.
The firm’s eurozone growth forecast has been revised lower from the previous one in September. Its report explains that this “reflects the tightening in financial conditions in Italy, which will take a toll on growth, as well as weaker global growth.”
It adds that the eurozone’s “core consumer price inflation has been stuck at around 1 percent for several years now, but we expect it to pick up somewhat over the next year (to between 1-1.5 percent) as unemployment is likely to keep falling and wage growth has accelerated, particularly in Germany. Yet this would still fall short of the ECB’s own forecasts and keep inflation under the ‘below but close to 2 percent’ objective. Nonetheless, we expect the ECB’s first rate hike to be implemented during the second half of 2019. However, if a pause by the Fed occurs in the first half of 2019, which looks quite likely, and the euro appreciates significantly versus the US dollar in response, the ECB may well extend its forward guidance of unchanged rates into the following year.”
For PIMCO, it is time to be quite reserved in general: “We see our near- and long-term views on risks being priced into financial markets. In this environment, we will look for broad, diversified sources of carry without relying on generic corporate credit risk and maintain an overall cautious approach in our portfolio construction.
“We think it makes sense to stay fairly close to home in terms of top-down macro risk factors, to keep powder dry and to look for specific opportunities in a more difficult environment where we see overshooting versus fundamentals. There is substantial option value in leaving room in our risk budget (e.g. holding more cash or accepting lower overall portfolio yield) to be able to respond, either to specific opportunities or in the event of a broad spread widening and rise in volatility,” the investment management firm’s analysts point out.
PIMCO adds it is underweight on European peripheral risk: “We remain cautious on European peripheral sovereign credit risk and corporate risk given the immediate challenges in Italy and the longer-term risks to the eurozone more generally in the next recession. Yet we remain open to specific opportunities where we are amply compensated for eurozone credit exposure.”
Could such an opportunity be a new Greek bond? “We do not have a strong view at the moment on a new Greek bond; there is a lot of uncertainty, a lot of volatility for the peripheral markets and especially Italy. Greece is an idiosyncratic story, and the market on Greek bonds is quite separate from the rest of the eurozone currently,” Mai tells Kathimerini.
“In the short term Greece has sufficient cash and does not need to tap the market yet, but sooner or later the cash buffer will run out and the country will at one point have to return to the markets, while it is not yet fully back on its feet. The risk of a possible bailout remains there, as the spread of the Greek bonds is still high, and there is no agreement yet between the European Commission and the International Monetary Fund on the sustainability of the Greek debt,” the Italian analyst warns.
He does not appear concerned about the prospect of a snap poll in Greece: “The Greek election per se is not largely significant for the eurozone, although it is obviously important for Greece. We are aware it is taking place by October and it is possible it will be in May, but the political risk is not big as it was the previous time. The center-right party is leading in polls and it looks fairly moderate,” Mai says.
He is more worried about his own country: “Italy is going to be stagnant, with significant political uncertainty. We expect growth in Italy to be around zero this year, or possibly slightly negative, given also the global slowdown. It is not difficult to see that kind of growth in Italy, as the growth potential is very low, less that 0.5 percent a year. The Italian government has moderated its tone, with the deal it has struck with the European Commission, and the pressure on the Italian spreads has eased, although spreads remain elevated,” he notes to Kathimerini.
