Debt-ridden countries become favorites

Greece and co. are the beneficiaries of Berlin's home-made budget crisis: while Germany is paralyzing itself, the former "periphery" of the eurozone is becoming the new star investor. This is because things are now going much better there than in the "core states".

Around a decade after the start of the euro crisis, a gradual role reversal is taking place on the bond market. Many of the former problem children of the single currency have now become model budget students thanks to years of austerity policies. In contrast, the prospects for previous anchors of stability such as Germany and France are bleak due to self-inflicted growth and budget crises. Greece, Portugal and Spain are therefore increasingly outperforming the core eurozone states on the bond market.

As the financial agency "Bloomberg" reports, fund managers at JPMorgan and Neuberger Berman, for example, are increasingly stocking up on the debt instruments of Spain, Portugal and Greece. Analysts expect that the peripheral countries will continue to perform significantly better in the coming year than the founding members in the center of the common currency.

The world of professional investors is thus increasingly upside down: while the "core" of the eurozone was considered reliable and stable for years, and the periphery of the monetary union as shaky, the situation is now increasingly reversing. It is not the former debt sinners in the south that have to justify themselves. It is the growth brakes in the donor countries.

From an anchor of stability to a brake on growth

First and foremost in Germany: the outlook here is worse than it has been for a long time - and worse than almost anywhere else on the continent. The economy slipped into recession in the third quarter and the EU Commission is forecasting a decline of 0.3 percent for the year as a whole. Only in Austria, Sweden, Hungary, Ireland and the Baltic states is an even greater slump expected. With the Federal Constitutional Court's budget ruling, Berlin is also shooting itself in the foot.

By contrast, the former debtor states are doing brilliantly: the economies of Spain and Greece are expected to grow by 2.4 percent this year, Portugal by 2.2 percent and even Italy by 0.7 percent. And while the EU Commission has given the green light to the budget plans of Greece, Ireland and Spain for the coming year in its annual budget review, Germany and France have failed. Paris even received an explicit rebuke back in the summer to spend no more than 2.3% more next year than this year - something the Macron government has so far studiously ignored.

The market shift can be seen above all in the yields of the former shaky candidates. The spread between ten-year bonds from Germany and Greece is now just 1.2 percent - at the height of the debt crisis it was over ten percent. In the case of Spain, the spread is still just under 1 percent and for Portugal it is only 0.6 percent. "The smaller euro countries have significantly improved their budget figures and their positive outlook is reflected in the European bond markets," Bloomberg quotes an analyst from Société Générale.

Pigeonholes for euro bonds no longer exist

For Commerzbank, for example, the changes are so serious and lasting that the old grid thinking in the eurozone has had its day. "The traditional country classification on the markets has broken down," "Bloomberg" quotes Coba interest rate strategist Michael Leister. "The fundamentals no longer justify the long-established distinction between core states, semi-periphery and peripheral states".

However, the convergence of yield discounts does not change the structural debt levels and therefore long-term risks for the time being. Although Athens' debt ratio is currently falling at the fastest pace in the entire eurozone, Greece's mountain of debt continues to pile up to a gigantic 161 percent of economic output. In Germany, by contrast, it is only around 65 percent.

Nevertheless, the constant change may change the calculations of many investors. This is because three quarters of Greek government debt is held by the EU bailout funds. This now makes them almost as safe a bank as Germany. As long as the former peripheral states remain on course for reform and growth, investors' appetite for their bonds is unlikely to wane. They are clearly happy to throw their old ways of thinking overboard for a little more yield.