Euro Area: Tail Risk Down, Economic Risk Up

European tail risks have clearly diminished, though this has had the perverse effect of deteriorating credit conditions for the euro area as a whole.

Euro Credit Risk vs. Economic Risk

A fter a sharp fall earlier this year, our measure of global credit impulse has troughed in the last few months. This suggests that economic activity should stabilize in the fourth quarter. But after recent strong rallies, risk assets seem to be well-priced for this stabilization and then a resumption of growth in early 2013.

That may be too optimistic.

True, the reduction of tail-risk in Europe is very welcome, but it has come at a price. It has perversely pushed up long-dated bond yields in the core economies as safe-haven flows have reversed. The upshot is that the all-important weighted average yield across the euro area has increased. Therefore, somewhat paradoxically, credit conditions for the euro area as a whole have actually deteriorated.

As we recently highlighted, with Europe now facing a double-dip recession, policymakers will likely need to do more, regardless of tail risks.

Bottom line: Only a benchmark cyclical weighting in European risk assets is warranted.

Print Friendly
Macroeconomic Research
BCA Research About BCA Research

BCA Research is the world’s leading provider of independent investment research. Since 1949, the firm has supported its clients in making better investment decisions through the delivery of leading-edge economic analysis and comprehensive investment strategy research. With access to over 150,000 raw time-series, BCA strategists are aided by one of the most extensive research databases in existence, cover every region of the globe, and provide analysis on virtually every investable asset class. BCA maintains a head office in Montreal, with local offices in New York, Los Angeles, London, Hong Kong, Sydney, and Buenos Aires. Not yet a client of BCA? Take a short trial to our research.