Disputes in the eurozone are a problem for stocks, not for bonds
Disputes in the eurozone are a problem for stocks, not for bonds
Disputes in the eurozone are a problem for stocks, not for bonds
The news of the disappearance of the eurozone is exaggerated, but it may not be very comfortable for stock investors.
The current budgetary battle of Italy with the European Union finally resonated through the rest of the eurozone Last week, when the Spanish, Portuguese and Greek debt joined the liquidation in Italian bonds. On Friday night, Italy's debt was lowered another notch by the rating agency
but the cut was small enough for the bonds to actually come together on Monday morning. Italy remains in investment grade territory.
The spread of contagion to other bond markets in southern Europe makes superficial sense: if investors really thought that Italy would defy European officials to the point of forced default, the future of the entire eurozone would be in grave danger.
However, this default scenario seems highly unlikely. Even though the EU has rejected Italy's budget plans, the Italian government against the establishment can not take things too far because it lacks popular support to leave the euro. Long-term investors can benefit from picking up the eurozone government bonds, cutting the coupons and waiting for the political noise to stop.
However, when it comes to eurozone shares, which are more closely linked to the economic outlook, this last political row should give investors a break.
The problem of the eurozone has always been economic growth, not deficits. Between 2000 and the present, the total amount of the Italian government's debt has expanded at a much slower pace than its peers, thanks to the smaller deficits. The Italian figures only seem worrying as a percentage of production because the country's economic performance since joining the euro has been very depressing.
Undoubtedly, Italy's debt as a percentage of production was already very high when it joined the euro. But Portugal is now almost as big, with Spain and France not far away. And none of these countries have a real risk of default as long as the European Central Bank supports them.
The Italian Prime Minister, Giuseppe Conte, on October 21. The country's debt as a percentage of production was very high when it joined the euro.
Photo:
Alberto Pizzoli / Agencia France-Presse / Getty Images
Public debts rarely fall by cutting government spending: countries rely on overcoming them. Italy's budget plans are only a minor transgression that would not violate the EU's 3% deficit rule. They could even give the economy a much needed fiscal impulse.
At this moment, European officials seem ready to drop, as they have done many times in the past, projections of too optimistic deficits in the budget of the new Spanish government. However, in Italy, his instinct is to crush a populist government he does not like, even at the risk of disrupting the eurozone's economic recovery, instead of seeking to alleviate discontent through growth-oriented policies.
Global investors have long applied a discount to European equities. While policymakers in the eurozone seem more determined to provide discipline than prosperity, it seems unlikely that will change.
Write to Jon Sindreu in jon.sindreu@wsj.com
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ORIGINAL ARTICLE THE WALL STREET JOURNAL
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