Credit Markets Normalizing, but Concerns Remain
Things are slowly improving in the bond market, but many of the issues in Europe that underlie the sovereign debt crisis remain unresolved.
With all the liquidity sloshing around the globe, central banks have succeeded in one of their intended goals, to normalize credit markets. Still, this liquidity has failed to spur the economic growth that will allow central banks to remove liquidity. Among the developed nations, the U.S. economy has performed the best, but it remains mired in a slow-growth recovery, averaging plus or minus 2% real gross domestic product. The eurozone has suffered six quarters of GDP contraction, the longest recession since the eurozone was established. Japan's economy is only just beginning to show signs of life after its quantitative easing program reduced the value of the yen; the yen has dropped 10% versus the dollar since the beginning of April and 17% since the beginning of the year.
While the credit markets have substantially normalized, we remain concerned that many of the issues in Europe that underlie the sovereign debt crisis remain unresolved. For example, Italian banks Intesa Sanpaolo (ISNPY) (BB-, no moat) and UniCredit (UNCFF) (BBB-, narrow moat) reported earnings last week, and while overall the numbers were respectable, the larger story was the increase in nonperforming loans. For Morningstar, our concern surrounding the continual increases in Italian nonperforming loans has been a consistent theme over the past year, and as the economic outlook for Italy remains poor, we suspect that these concerns will remain over the near term.
David Sekera does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.