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Euro zone not out of the woods, RBC executive warns

In recent days, several analysts and economists have urged investors to stay cautious, suggesting that the Greek restructuring and the ECB's liquidity injection into the banking system have merely lulled the markets.

Petros Giannakouris/Associated Press/Petros Giannakouris/Associated Press

Approval of Greece's sovereign debt overhaul, the biggest bond restructuring on record, does not mean the worst is over for the euro zone despite buoyant markets, one of the top Royal Bank of Canada executives and other market watchers say.

"The market is having to work through this crisis in successive waves," Harry Samuel, chief executive officer of RBC's European investment arm, said in an interview Wednesday in London.

"The market has clearly moved through one wave of the crisis, but that doesn't mean there aren't more problems to come, both within Greece and other elements of the euro zone."

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He is not alone in his views. In recent days, several analysts and economists have urged investors to stay cautious, suggesting that the Greek restructuring and the European Central Bank's €1-trillion ($1.3-trillion) liquidity injection into the banking system have merely lulled the markets. The injection, some have said, is an "adrenalin rush" that could wear off fairly quickly.

They fear Portugal could erupt and that Greece's second bailout, combined with the bond "haircut" that eliminated more than €100-billion of national debt, are insufficient to keep the country out of the critical care ward for long.

In a note, Société Générale economists James Nixon and Michel Martinez said that "significant doubts remain about the viability of the plan for Greece" and that Athens will probably not meet its fiscal deficit targets.

"This practice of underestimating the fiscal multipliers simply because it is politically expedient is one of the reasons why it will only be a matter of time before Europe's sovereign tensions re-emerge," they said.

Markets have been on the upswing as Greece successfully ground its way through the bond swap, the ECB stabilized the banking sector with ultracheap loans, some of which were used to buy sovereign debt and bring down their lofty yields, and sentiment improved in the U.S. banking sector.

Mr. Samuel, 46, a Canadian who became CEO of RBC's European investment arm last summer, is one who thinks Portugal could emerge as a trouble spot.

"The market continuously looks for weak links and Portugal is clearly one that is on the horizon. They are clearly struggling to meet some of their austerity commitments."

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He thinks Portugal could be headed for a Greek-style bond haircut, even though the "troika" – the ECB, the European Commission and the International Monetary Fund – has stated that a Greek-style debt crunch would not be offered to other debt-swamped countries.

"I think these statements are policies that are meant to be broken," he said. "We have a more realistic view. A precedent has been set and so there would be an argument to say, 'Well why can't [Portugal]have that kind of treatment?'"

Economists note, however, that bailouts and debt haircuts come with tight conditions, such as severe austerity and economic reform programs, plus fiscal oversight from the troika. Athens essentially has given up control of its budgets to the troika, triggering protests from Greeks who fear their economic and financial course is being dictated from Brussels and Berlin.

"Another sovereign entity might determine that, frankly, the cost-benefit analysis does not work for them; taking a haircut and then having to, in effect, forfeit your sovereignty," Mr. Samuel said.

Even though the markets have come roaring back from their October lows, when a chaotic Greek default could not be ruled out, Mr. Samuel doesn't think the deal-making, such as mergers, acquisitions and initial public offerings, will take off, too. That's because the euro zone economy is contracting and other economies are slowing.

"The economy will be slow to recover from this crisis," he said. "You don't see that real economic confidence in European corporate boardrooms."

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On Wednesday, the Organization for Economic Co-operation and Development (OECD) reported that fourth-quarter, 2011, growth in the Group of 20 countries (which includes Canada) slowed to 0.7 per cent from 0.9 per cent in the previous quarter.

Europe was one of the worst-hit areas. Growth in both the 27-country European Union and the 17-country euro zone fell by 0.3 per cent, marking the first fall since mid-2009. Among the G20 countries, Germany, Italy and the United Kingdom each saw its economy shrink in the fourth quarter.

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About the Author
European Columnist

Eric Reguly is the European columnist for The Globe and Mail and is based in Rome. Since 2007, when he moved to Europe, he has primarily covered economic and financial stories, ranging from the euro zone crisis and the bank bailouts to the rise and fall of Russia's oligarchs and the merger of Fiat and Chrysler. More

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