European Markets in Recovery Mode in 2012

Published: February 1, 2012

Europe’s economy and markets, buoyed by European Central Bank lending, “should remain in recovery mode” in 2012, UniCredit SpA said in its economic outlook.

The euro-region economy “is already stabilizing” after bottoming out this winter, according to the report presented today in Milan. Still, Italy, Portugal and Greece will suffer recessions, and austerity measures and uncertainty “will be a drag” on the region’s recovery, Italy’s biggest bank said.

“We are at the more optimistic end of the spectrum of those who try to forecast 2012,” Erik F. Nielsen, UniCredit’s chief global economist, said in an interview in Milan, adding that UniCredit forecasts euro-region growth of 0.5 percent this year. “We’re going to avoid the big recession.”

Unlimited three-year loans made by the ECB in December have helped shore up sentiment among investors in the region, pushing down bond yields. Italy’s 10-year benchmark bond yielded 5.982 percent today, compared with almost 7 percent on Jan. 11, the level that led Greece, Ireland and Portugal to seek bailouts.

“The market recovery should continue,” UniCredit said in today’s report. “Spreads should tighten, equity prices should move higher, and as banks enjoy greater access to ECB liquidity in both euros and dollars, their need to sell FX-denominated assets will ease -- and with that we see further euro weakness.”

Still, amid investor concern about private-sector involvement in future euro-area bailouts, the debt crisis has morphed into “a financial-sector crisis, and is starting to threaten the non-financial private sector as well as the social cohesion of some countries,” the bank said.

Authors: Chiara Vasarri and Sonia Sirletti