All has changed utterly one year on as signs of recovery increase
The other big story of 2012 was the putative “Grexit”. Some saw it as a forgone conclusion, with investment bank Citigroup declaring in May that there was a 90 per cent chance of Greece being pushed out of the euro zone.
Since then, however, the environment has improved significantly and the tide appears to be turning in favour of Greece staying within the bloc.
Indeed, more than 70 per cent of investors responding to a Barclays Capital survey earlier this month indicated that they expected no country to leave the zone in 2013.
Citigroup has revised its probability downwards to 60 per cent. Traders on Intrade, an online prediction market, now point to a 20.5 per cent chance that a country might drop the euro before next December, rising to 30 per cent for December 2014. This is good news.
“It would have been cataclysmic 12-18 months ago but the markets are now almost prepared for it,” Doyle says of a Greek exit.
Greece is not out of the woods yet, however, and the pendulum could yet swing in favour of its departure. Issues such as recent reports of continued failings in tax collection will do little to reassure.
“If Greece is being perceived as not stepping up to the plate, investors will lose patience and the chatter of a Greek exit will start hitting the headlines again,” notes Doyle.
Such an unprecedented departure of a euro zone country would lead to a lot of instability, causing “massive movements” in peripheral bond yields.
On the plus side, if progress continues in terms of a resolution to the euro zone debt crisis, we could see a return to the markets next year for Ireland. After all, Ireland’s biggest fan, Michael Hasenstab of Franklin Templeton who holds a 10 per cent stake, is now boasting of an Irish turnaround, a move likely to draw in other investors.
“It augurs well,” notes O’Reilly of an Irish return to the markets, adding, “we’re seeing a lot of confidence from international investors”.
O’Leary agrees. “The NTMA [National Treasury Management Agency] has done a good job in getting across its message and now has a good opportunity to get away a dollar issue, as there is a lot of interest in the US for Irish paper,” he says, noting that he was “very surprised” that AIB and Bank of Ireland recently got their bond deals away.
However, he adds that Ireland is likely to need some sort of back-stop programme, such as the ECB’s outright monetary transactions.
But Europe’s being a step closer to resolving its debt crisis, with some peripheral countries such as Ireland edging closer to normality, are no guarantees that the turmoil is over.
“The risk of a euro break-up is still the greatest risk for next year,” says O’Reilly, while Mario Monti’s impending resignation as Italian prime minister may threaten recovery.
“We will have these bouts of euphoria and despair because of policy decisions. It will still be a bumpy ride,” O’Leary says.
Time to fasten the seatbelts once more.