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Analysis: Euro zone survival? Depends on where you work

A protester holds a placard during a rally in Trafalgar Square in central London May 1, 2013. REUTERS/Toby Melville
A protester holds a placard during a rally in Trafalgar Square in central London May 1, 2013. REUTERS/Toby Melville

By Andy Bruce

LONDON (Reuters) - Three years into an unresolved euro zone crisis, Reuters polls show a marked split on the future depending on whether forecasters are based inside or outside the currency bloc.

What sort of institution those who are regularly canvassed work for also appears to be a factor.

In last week's Reuters poll of bond market strategists and economists, the divisions were clear.

Asked if government borrowing costs for peripheral euro zone countries such as Spain and Italy would soon head back into the danger zone, only around a quarter of economists working for euro zone-based institutions answered yes.

For non-euro zone respondents, slightly more than half predicted a return to crisis levels in the bloc's debt markets.

It might not take long to find out who is right. Government borrowing costs have spiraled to dangerous levels in Portugal this week, racked by a political crisis that also pushed Spanish and Italian bond yields higher on Wednesday.

Greece is also facing a crisis again, with it being given only a few days by international lenders to deliver on conditions attached to its bailout in order to receive its next tranche of aid.

To some extent, all forecasters are subject to outside pressures - whether they are work for investment banks, governments betting on strong economic growth, or independent research houses seeking a splash with eye-catching predictions.

It is a familiar pattern.

Last June, when the sovereign debt crisis was reaching fever pitch, Reuters asked economists if the currency union would survive in its current form for the next 12 months.

Seventy-nine percent of those working for euro zone-based firms said it would. Outside it, barely half said yes.

"There is uncertainty, and so there is more than the usual subjective judgment that tends to seep into expectations, as past activity figures bring very little clarity about the outlook," said Lena Komileva, director of consultancy G+ Economics.

The same question on the euro zone's survival appeared in a Reuters poll from January last year. None of the 30 economists working for German and French institutions predicted any sort of break-up.

And of the 10 who predicted its failure, seven worked outside the euro zone, including four from Britain, where euroskepticism runs high.

NOT JUST THE EURO ZONE, OR ECONOMISTS

This geographic tilt isn't limited to the euro zone.

In November 2010, the high end of forecasts on the final size of the U.S. Federal Reserve's second round of bond buys - dubbed QE2 - was driven by the 18 primary bond dealers that do business directly with the Fed.

The median estimate for QE2 from the dealers, who would be selling bonds to the central bank at a very good price, was $1 trillion, compared with $600 billion for the wider majority of economists, most of whom did not work for primary dealers.

"There is a bias, but it isn't just a European one. How many American banks forecast the imminent demise of the American financial system that they were involved in? Look at how many UK banks predicted the impending UK recession," said Danny Gabay, economist at Fathom Financial Consulting.

No economist polled by Reuters predicted the UK's entry into its worst post-war recession in 2008 until it was already there.

Investors too can display crowd think.

In August, fund managers were asked if European Central Bank President Mario Draghi's announcement that he would do "whatever it takes" to save the euro changed their view of the crisis and sovereign bonds in the euro zone.

Three-quarters of fund managers based in the euro zone said yes, but fewer than a quarter in the United States and Britain were in agreement.

"It isn't just banks, to be fair," said Fathom's Gabay, who points to the need for independent forecasting. "You rarely find oil analysts predicting oil prices will fall, you rarely find equity analysts predicting equity prices will fall, because they're in the business of selling."

(Graphics by Vincent Flasseur, Editing by Mike Peacock/Jeremy Gaunt)

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