Reassured by ECB anti-crisis moves, major international investors have begun dipping their toes back into the eurozone, even though they don’t believe the crisis is over.
“The worst-case scenarios of those who had feared the eurozone would disappear has receded a bit,” said Jean-Louis Mourier, an economist at Aurel BGC brokerage.
Many foreign banks and investment and pension funds pulled their placements out of the eurozone after Greece, Ireland and Portugal were forced to seek bailouts and the crisis threatened to engulf Italy and Spain, the bloc’s third- and fourth-largest economies.
However the European Central Bank has since pumped a trillion euros into banks to ensure liquidity and outlined a plan to buy-up unlimited amounts of debt of governments pursuing bailout plans.
And investors are again buying shares in French, Italian and Spanish banks, as well as bonds of the most fragile eurozone states, which has contributed to a rebound in stock markets since this summer and sent Spanish and Italian government borrowing rates lower.
Jean-Francois Bay, director of the Morningstar France independent market research firm, said he noticed in September that foreign investment funds had returned buying eurozone shares “for the first time since February 2011”.
There has also been a return to purchasing Italian and Spanish debt.
The September pledge by the ECB to buy up short term debt of governments which seek a bailout and agree fiscal adjustment terms has reassured investors, even no country has yet to sign up for the newly available programme.
PIMCO, the world’s largest investment manager, cited that security blanket when it said in October that Italy and Spain now “offer relatively attractive sources of credit risk”.
While PIMCO said it would continue to take a cautious approach, it had steered clear of Italian and Spanish debt for three years, and also said it would continue to avoid Greek, Portuguese and Irish debt.
The biggest independent French fund manager, Carmignac, has indicated that it has again begun buying Italian and Spanish short-term debt.
Carmignac moved out of most eurozone bonds in July 2011, and said this June that it no longer held any eurozone sovereign debt.
For their part, US prime money market funds, which manage hundreds of millions of dollars, increased their exposure to eurozone banks for the third consecutive month in September, according to Fitch Ratings.
The increase was 16 percent in dollar terms over the month to stand at 10.6 percent of total holdings.
“Many investors may have overestimated the risk in the eurozone, but it hasn’t disappeared either,” said Rene Defossez, a fixed-income strategist at Natixis investment bank.
The flow back to the eurozone may represent more a correction than a vote of confidence however.
“This return of investors is extremely fragile,” said Patrick Jacq, an analyst at France’s BNP Paribas bank.
He warned foreign investors could be tempted to book profits and pull back out just as quickly.
“It is too early to say if this movement that started recently will continue,” said Bay.
For certain investors the return to the eurozone may also be simply a default option to hedge the growing risks linked to a political stalemate leading to a sharp retrenchment in US fiscal policy, the so-called fiscal cliff.
“According to the latest survey of funds by Bank of America-Merrill Lynch, the risks related to the fiscal cliff in the United States are seen as greater than those of the eurozone,” noted Mourier.
Fitch noted US money market fund exposure to eurozone banks was still down by 70 percent from May 2011, and unlikely to ever fully recover due to fundamental changes in the market.
Eurozone banks had depended on US money market funds for access to dollars to carry out business denominated in the US currency, but when this access dried up European banks largely moved out of dollar denominated activity.
Pressure to meet higher core capital ratios have also encouraged eurozone banks to sell off assets and retrench their activities.
Foreign investors also remain concerned about the dim near-term economic outlook in the eurozone.
“The eurozone will be in recession next year in contrast to the United States,” said Defossez, adding that 2013 is full of political risk given elections in Germany and Italy.
[Image via Agence France-Presse]