Cash Influx Into Peripheral Europe Grows Again
Foreign direct investment into the peripheral countries of the Eurozone was in retreat from 2007 on. Inflows are still low compared to pre-crisis levels, but there are signs that there is renewed appetite for opportunity in the economies hit worst by the global financial crisis and the Euro crisis that followed on its heels.
Now Spain and Italy are beginning to see an especially strong bounce-back. Some of this investment is from companies domiciled elsewhere building or expanding local production capability — taking advantage of low prices. But flows are also going into assets beaten down particularly hard by the crisis — for example, real estate, distressed local debt, and local government bonds.
Peripheral Countries Took Some Painful Medicine
The European periphery fell hard during the crisis, and has now endured years of austerity. Their recovery has been basically unaccompanied by the same large monetary easing being conducted by central banks in the U.S. and Japan. In the absence of that easing, the recovery hasn’t been as robust as observers would wish — instead it has largely been driven by painful reforms. That has led outsiders to hope that when the recovery really takes hold — perhaps helped by a European Central Bank (ECB) that finally begins to ease in earnest — a powerful reversion to the mean will take place. Translation: bargain-priced assets now have a real potential for appreciation.
Eurozone Banks Shed Assets Ahead of ECB Review…
Foreign funds are shopping for assets just as European banks are looking to get rid of them, with new ECB reviews promising to shine an unwelcome light on their books and the dodgy assets they contain. If these banks can unload those assets before they cause trouble, so much the better. Analysts estimate that there may be over $100 billion in troublesome debt looking for new owners, 20 percent of that is in southern Europe. American banks and hedge funds appear to be willing to buy much of this bad debt.
… and Foreign Private Equity Is Buying
Foreign private equity funds are also looking for companies to scoop up at bargain prices. Bain Capital, which got some negative press during Mitt Romney’s presidential campaign, has already made handsome profits buying distressed firms in Spain and Italy, then turning them around, and selling them.
Others are doing the same, following a venerable private equity pattern. As these economies strengthen, though, the crisis glory days will eventually come to a close, and there will be fewer bargains to be found. For now, though, according to analysts, private equity still has resources set aside to devote to the Eurozone periphery. Spain and Italy have already made significant progress, but Portugal — and especially Greece — still have a ways to go.
