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Spire comments on a looming Spanish bailout, Greek debt and global economic health

24 July 2012
Channel NewsAsia – AM Live

Spire comments on a looming Spanish bailout, Greek debt and global economic health

The possibility of a Spanish bailout by the Eurozone seems increasingly likely as the country’s crisis deepens. There are widespread concerns that Greece would not be able to fulfill its debt obligations under the European bail-out package. The two largest economies in the world, the U.S.A. and China, are slowing down, adding more gloom to the bleak outlook. Leon Perera, Chief Executive Officer of Spire Research and Consulting, was invited to share his insights on Channel NewsAsia – AM Live.

Moody’s had changed the outlook for Europe’s top economies, and Perera emphasized that a ratings cut is inevitable at some point. This comes from the recognition that these economies, even the relatively healthy Northern European countries like Germany, have to contribute to the impending bailout in Spain.

Perera added that a sovereign bailout of Spain by the European Union is a matter of time. The market has conclusively shown that it does not expect Spain to be able to resolve its problems on its own. There are two factors making a bailout more likely, one being the struggling Spanish banks, who recently accepted European rescue loans; and the other being the Spanish regions, such as Valencia, asking for emergency funding.

On the issue of Greece, Perera noted that while there is the possibility of Greece being unable to fulfill current debt obligations, the government will most likely pull back at the last minute and reach a compromise, with the EU pursuing a similar strategy. We have seen such brinkmanship in the past, and the current Greek leader is a responsible, mainstream politician who would not risk expulsion from the EU.

Perera also highlighted that there is a very high probability of a rate cut by the European Central Bank (ECB). There is tremendous pressure from the G20 in view of Spain’s situation, and international bodies such as the IMF have added to this pressure. A ratings cut of 25 percent basis points in the next few months will not be surprising.

Across the Atlantic, things do not seem rosy for the U.S. The economy is bogged down by negative retail sales growth for three consecutive months, for the first time since 2008. Perera was quick to highlight that it does not mean that the economy is heading for a recession. Two likely triggers for any recession, a mismanagement of the U.S. deficit and a worsening of the current European situation, do not seem to be on the horizon as yet. Hence a return to a 2008 style recession is unlikely.

China has also seen slow growth recently, as it struggles with a bearish manufacturing situation and an export slow down to Europe. However, this is a politically sensitive year in China, where a leadership transition at the Party congress is poised to take place. The government will deploy fiscal stimulus, engineering a government-led investment recovery in the second half of 2012.

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