The first quarter winds to a close and, for most investors, it must have been a profitable one with stocks climbing and peripheral euro zone bond yields falling largely on the back of the European Central Bank’s efforts to pump prime the financial sector with a trillion new euros. Reuters’ asset allocation polls on Tuesday will look at whether there has been a significant pull-back from core government debt and the “risk on” trend can continue.
The second quarter may be much less straightforward (though let’s not forget at the turn of the year, no one thought the first quarter would be either) but let’s not get too far ahead of ourselves.
The coming week provides a number of chances to take the temperature of the euro zone debt saga. Spain, having ripped up its 2012 deficit target, will present its full budget a day after a general strike and EU finance ministers gather in Copenhagen where the still unresolved issue of how to structure the euro zone’s permanent rescue fund will be structured.
Many in the euro zone want the resources of the EFSF bailout fund to be rolled into its successor, the ESM, creating a 750 billion euros pool which may be enough to scare the markets off from attacking Italy and Spain, particularly if the IMF flexes its muscles too. A decision could be made in Copenhagen though Germany continues to resist. The most likely solution is the least ambitious one – an increase of the bailout capacity to 692 billion (500 billion from the ESM, to be reached gradually over four years + 192 bln of money already committed to the Greek, Irish and Portuguese programmes by the EFSF).
The other key ingredient is public willingness to tolerate years more economic pain. The Portuguese have held a strike and Spaniards will do so this week, with and Italian down-tools also looming. So far, protest has been sufficiently muted that politicians have not been deflected from their cuts and reforms programmes. Spain’s ruling PP is likely to win an Andalusian election over the weekend, a victory which may encourage it to extend its austerity drive.