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Greece's latest bailout comes with strings attached
Share prices appreciated across much of Europe during February as equity investors appeared a little more optimistic about the future. In Germany, the DAX index rose 6.1% over the month, having increased 16.2% since the start of 2012. In France, the CAC 40 index posted a monthly increase of 4.7%, having risen 9.3% since the beginning of the year. In Greece, however, the Athens General index fell 6.6% during February although it did rise 9.3% over the year to date.
Another bailout for Greece – worth around €130bn (£109bn) – was finally agreed towards the end of February. In return, Greece has to bring down its deficit to 120.5% of GDP within the next eight years and will be forced to accept the presence of a permanent European Union monitor in the country. According to Jose Manuel Barroso, the president of the European Commission, the agreement is an “essential step forward” that will avert an “uncontrolled default, with all its grave economic and social implications”.
Nevertheless, following the news of the agreement, ratings agency Standard & Poor’s announced that Greece’s debt had been downgraded to the status of “selective default”. Meanwhile, its counterpart Moody’s downgraded the credit ratings of Spain, Portugal, Italy, Malta, Slovakia and Slovenia during February, and placed the ratings of France and Austria on “negative outlook”. Moody’s cited uncertainty over the eurozone’s ability to deliver economic and structural reform.
Leaders in the eurozone signed a new treaty to create a European Stability Mechanism that is intended to support financial stability within the euro area. However, finance ministers at the recent G20 summit warned that the eurozone’s member countries would have to continue to assess the strength of their support facilities if the grouping of 20 richest nations is to intervene with assistance in future.
The eurozone’s economy contracted by 0.3% during the fourth quarter of 2011. The economies of Italy and the Netherlands joined Portugal and Greece in recession during the final three months of the year while France’s economy grew by 0.2%, Germany’s economy contracted by 0.2% and Spain’s economy shrank by 0.3%.
According to the Investment Management Association, Europe excluding UK and European Smaller Companies were two of the most unpopular fund groupings during 2011 as a whole, with both sectors experiencing significant outflows. Moving into January, Europe remained out of favour with investors, and Europe excluding UK was again one of the least popular sectors during the month.
Paul Dixon FPFS
Chartered Financial Planner