The return of the Eurozone crisis

Last month Cyprus stood on the brink of becoming the first country to leave the bloc before a last-minute deal saved the nation’s banking sector and the government from bankruptcy. Meanwhile, Italian elections produced a stalemate, leaving Italy with a minority government that will struggle to vote policies through parliament without eventually returning to the polls.

More uncertainty in the UK’s largest trading partner is not what businesses need when attempting to export and invest in the region. However, firms should avoid a blanket approach to assessing the Eurozone’s economic environment. Our analysis highlights that investor perceptions of credit risk, as measured by government bond yields, evolved markedly over the last year (see Figure 3 below).

In particular, investors’ attitudes towards investing in Ireland and Portugal have improved, as their governments have got on with implementing tough structural reforms. Ireland can now borrow at a cheaper rate than Spain and Italy, where confidence that politicians can pass similar programmes has ebbed.

Cyprus is a reminder of how quickly events unfold in the Eurozone. Table 1 below identifies some key milestones in the next two months for businesses to look out for that may signal turning points in investor sentiment.

Table 1– Key Eurozone dates for your diary
April May
Early April - Troika to resume talks on Greek structural reform measures and decide on disbursement of next €2.8 billion tranche of bail-out money 1st – Deadline for Ireland to publish new bankruptcy rules
12th - Eurogroup Finance Ministers meeting in Ireland 15th – Flash estimates of Q1 2013 GDP released
19th /20th - Spring Meetings of the World Bank and IMF in Washington
30th - preliminary estimates for March unemployment released

Figure 3 – Sovereign bond yields indicate investors’ changing perceptions of risk across the Eurozone

Figure 3 – Sovereign bond yields indicate investors’ changing perceptions of risk across the Eurozone

Yield on a Republic of Cyprus bond expiring in February, 2020
Source: Thomson Reuters Datastream, PwC analysis