“Improving market conditions increase the risk of complacency, writes Andreas Utermann.

“Should we share José Manuel Barroso’s confidence that the eurozone will put the worst behind it this year? Certainly, the success of Ireland’s return to the bond market and Portugal’s recent bond issuance are grist to that mill, but a more nuanced view may be warranted.

“Throughout the eurozone crisis, we maintained a conviction the single currency was likely to remain intact and, some months before the pivotal “whatever it takes” statement by European Central Bank President Mario Draghi, identified three conditions for putting the euro on to a sustainable footing. These were: the introduction of an effective banking union within the eurozone; the establishment of greater fiscal alignment between member states; and the ECB assuming the role of lender of last resort.

“Progress has been made in each of these areas, and in response, credit default swap spreads across Europe, including the periphery, have contracted markedly over the past 12 to 18 months. Despite recent market volatility, Spanish, Portuguese and Irish bonds are now trading at spreads of just 135, 293 and 105 basis points, respectively, down from peaks of 630, 1,527 and 1,192 basis points.”

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