Global Investing

Who’s tired of the ”Markets up on Greece, markets down on Greece” headlines of the past few weeks? (I am.)

Today it’s an up day, with world stocks hitting a six-month peak on hopes that Greece will secure a second bailout package next week (finally, really).

But beneath the optimism lies a dire Greek economic and fiscal situation.

The Greek economy slumped 7 percent in the last quarter of 2011, with the rate of contraction since Q4 2008 reaching a whopping 16 percent in cumulative, real GDP terms.

Weak growth is hampering efforts to consolidate the fiscal position. Goldman Sachs, in fact, expects the deep recession has fully offset budget consolidation efforts. Analysts at the bank write:

“The fiscal adjustment, which started off with an impressive deficit reduction of more than 5% of GDP in 2010 stalled in 2011… despite a significant fiscal effort.

The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.

However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece — rising debt and weak economic growth pushing the country to seek a bailout — as a result of tighter financial conditions.

Take this warning from JP Morgan:

Financial conditions have deteriorated far more in peripheral Europe than in the core. The drag from this on peripheral GDP is akin to that seen following the Lehman crisis.

Ministers and bankers meeting at the European Bank for Reconstruction and Development‘s annual gathering in London tomorrow and Saturday have a sorry mess to scrutinise.

By the bank’s own (revised) forecasts, its region of central and eastern Europe will contract by over 5 percent this year. Many countries in eastern Europe took too much advantage of western banks’ lending spree, and businesses and households are struggling to pay back foreign currency loans.

Falling commodity prices have hit countries like Russia and Kazakhstan, and a burst consumer credit bubble is risking double-digit contraction in the Baltic states and Ukraine.