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Euro Zone Periphery May Be Due a Re-Rating

Wednesday, 2 Jan 2013 | 5:01 AM ET
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The much-maligned peripheral economies of the euro zone are showing some encouraging signs, leading to talkof a revaluation which would have seemed optimistic for most of last year.

Greece, Ireland, Portugal and Spain all reported current account surpluses in late 2012, which has led someto suggest that the worst of the crisis is coming to a close.

There are fewer economists who, like Jonathan Loynes of Capital Economics, believe that Greece is "likely" to exit the euro zone and the crisis will "re-escalate"this year.

"It's a different scale of problem. We do not have the same potential for Europe to generate systemic risk we had a year ago," Stephane Deo, head of European economic research at UBS, told CNBC.

"The euro breakup call has been proved entirely wrong. The economy is recovering. European imbalances have been reduced massively, half of the GDP of Europe is now in countries which are able to stabilize their debt-to-GDP ratio."

He argued that there is a case for further re-rating of peripheral euro zone countries, if growth improves unexpectedly or Spain goes into the European Central Bank's new bailout-lite,the Outright Monetary Transactions (OMTs) program, earlier than forecast.

(Read More: Why 2013 Will See Faster Global Growth)

The OMTs, together with ECB head Mario Draghi's pledge to do "whatever it takes" to save the single currency,were instrumental in halting the spiraling cost of debt for the peripheral economies last year.

Ireland, which takes over the European Union presidency this year, has been billed as one of the periphery's success stories. Its Deputy Prime Minister told CNBC Monday that the country will emerge from the crisis as Europe's "winner."

(Read More: Ireland Poised to be Europe's Winner?)

And even Greece, which for months last year seemed in imminent danger of a euro zone exit, appears to have calmed down.

Yet there is still plenty of cynicism about the periphery's future in the market by those who think their problems have merely been put off and may be worsened by the imposition of austerity measures.

(Read More: Euro Zone Doomsayers Adjust Predictions)

"These countries need to exit the euro, they need to default their debt, re-denominate their currency and get on with growing the way they always have, and stop benefiting Germany through all these transfers we see effectively through a capital account deficit in the periphery and surplus in the core," Paul Gambles, managing partner at MBMG International, told CNBC.

"If they (the euro zone authorities) handled what should have been fairly straightforward situations in Greece and Ireland so badly, I'm worried about their ability to deal with Spain and Italy effectively.

Short-term, we'll get into and apparently out of crisis, but I'm worried about how effective ECB action will be when the dust settles."

He dismissed the euro zone as "uninvestable because it is ungovernable."

Written by Catherine Boyle, CNBC. Twitter: @cboylecnbc.

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