|
|
Sector balances as indicators for intra-EMU tensions
· Recent credit rating downgrades of EMU countries Spain, Portugal and Greece have led to a widening of government bond spreads to pre-EMU levels.
· The six economies most affected by the spread widening face different challenges in terms of structural adjustments, fiscal adjustments and deleveraging.
· Whereas for Spain and Ireland downsizing of the residential sector and deleveraging remain of the essence, for Italy the main problem is containing public debt, leaving no room for fiscal stimulus.
· Greece and Portugal record extreme external deficits, making them vulnerable to deflationary price shocks.
Asset conclusions: spreads between EMU government bonds overstate break-up risk, but re-narrowing will be slow and volatile, depending on the respective prevalence of fiscal expansion and private deleveraging.