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Euro zone's strugglers seen needing more bailouts to plug finances - Reuters poll
August 29, 2013 / 4:20 PM / 4 years ago

Euro zone's strugglers seen needing more bailouts to plug finances - Reuters poll

The European flag flies outside of the La Canada shopping centre in Marbella, southern Spain January 23, 2013. REUTERS/Jon Nazca

LONDON (Reuters) - Although the euro zone economy is slowly starting to recover, there is still a sizeable chance its most vulnerable countries will need more outside help within a year to sort out their finances, a Reuters poll showed on Thursday.

The survey of 60 economists also showed the European Central Bank is expected to keep both its main refinancing and deposit rates on hold until at least 2015, unchanged from previous polls.

Led by Germany, the currency union exited recession in the second quarter, but many of its major economies - especially in southern Europe - are still burdened by recession.

Respondents attached a 75 percent probability to one of the four countries already under a European Union and International Monetary Fund bailout needing yet another aid package to keep afloat financially.

Greece was the near-unanimous top pick of the economists who thought another bailout was likely - little surprise given Athens and Berlin have talked openly of the prospect of a third, smaller bailout package to cover finances next year.

But 22 economists said Portugal would also need more help, followed by just a handful of responses for Cyprus and Ireland.

Several economists pointed out that any further bailouts would likely be small and supplementary, rather than running into several tens of billions as in previous years.

Rabobank economist Elwin De Groot said some countries might need additional funds to tide them over by mid-next year, but that there was no reason to panic.

“Generally there has been progress in trying to heal the periphery in the last few years, especially in those countries which have close scrutiny from the troika like Greece, Ireland and Portugal,” he said.

“However, some of these countries have been hit so hard by the negative spiral created by austerity that is making it very hard for the economy to recover,” he added, singling out Portugal in particular.

DON‘T BET ON USING THE BACKSTOP

Economists put a median 35 percent chance a country will ever activate the ECB’s Outright Monetary Transactions (OMT), a backstop to prevent sovereign borrowing costs spiralling out of control through the central bank purchasing government bonds.

Six months ago, respondents were split on whether the OMTs would be used in 2013.

Some economists in the latest poll who said the OMTs might be activated, but not necessarily as a crisis measure.

“We expect bailout countries to utilise OMTs at the end of their programmes to regain full market access. Our working assumption is that OMTs will not be used ‘defensively’,” said Philip Shaw, chief economist at Investec.

Respondents were unanimous that the ECB will keep interest rates on hold next week, although they will be listening for any change in nuance in its forward guidance policy, when its president, Mario Draghi, speaks on Thursday.

“We expect the Governing Council to ratchet up its forward guidance rhetoric and rely on additional non-standard measures to combat unwarranted increases in short-end rates,” said Guillaume Menuet, an economist at Citi.

ECB Governing Council member Ewald Nowotny said in a panel discussion central banks were giving markets “a certain security” by deploying forward guidance, saying they would keep interest rates low for the foreseeable future.

Executive Board member Joerg Asmussen confirmed the ECB’s guidance of keeping interest rates low or lower for an extended period on Tuesday.

The majority of respondents also expects the central bank’s staff will upgrade its quarterly economic outlook for 2013, following a raft of positive confidence and business survey data.

Additional reporting, analysis and polling by Ashrith Rao Doddi, polling by Swati Chaturvedi in Bangalore Editing by Jeremy Gaunt.

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