Market Economics | Interest Rate Strategy - BNP PARIBAS ...

More documents

Recommendations

Info

Eurozone: External Exposure • Portugal, like Greece, has a relatively high share of its public sector debt held abroad. • In contrast, foreign investors hold a lower proportion of Spanish and Italian debt. Chart 1: General Government Debt Held Abroad (% GDP) 100 90 80 70 60 Contagion not equal The contagion across sovereign debt markets in the eurozone has been spreading but yield spreads between Portuguese and German government bonds have widened substantially further than their Italian and Spanish counterparts. The underperformance in Portugal reflects various factors, some fundamentally driven, some more market-driven. 50 40 30 20 10 0 Greece Belgium Source: IMF Portugal Austria Italy France Ireland Netherlands Germany Finland Spain The fundamental differences between the vulnerable economies in the eurozone are discussed in detail in the accompanying article Eurozone Periphery: Compare and Contrast. In short, the key problems in Portugal include the following: the low growth rate of the economy, which makes it difficult to stabilise the public finances; and the low level of national saving, linked to the lack of competitiveness of the economy, which leaves the Portuguese economy heavily reliant on capital inflows. While the public sector debt-to-GDP ratio in Portugal is much lower than in Greece – at around 75% and 115%, respectively, in 2009 – it was the structural nature of the problems listed above which led us to conclude earlier in the year that, were problems in the eurozone bond markets to spread beyond Greece, then Portugal would be right in the firing line. Our concerns have been borne out. Foreign affairs There are also market-specific factors to consider. One is less liquidity in the Portuguese bond market than in other, larger bond markets in the eurozone. Another significant difference is the high proportion of public debt in Portugal held by overseas investors. Chart 1 shows IMF data on general government debt held by foreign investors as a percentage of GDP for the largest eleven eurozone member states. Chart 2 then converts this data into the proportion of general government debt held by foreign investors, using debt to GDP and nominal GDP data from Eurostat. Foreign ownership of government debt is much lower in Spain and Italy than in Portugal which matters in a period of increasing risk aversion. Chart 2: General Government Debt Held Abroad (% Total) 90 80 70 60 50 40 30 20 10 0 Austria Greece Finland Portugal Netherlands Source: IMF, Eurostat, BNP Paribas Ireland Belgium One positive factor for Portugal relative to Greece is its lower rollover risk, with redemptions in relation to GDP in 2010 about half those of Greece. The same is true for Spain. Spain has other problems, including the after-effects of the property crash and high levels of private sector debt. For now, markets have given Spain the benefit of the doubt, with the 10-year yield spread between Portugal and Spain rising above 200bp, the highest since the mid-1990s. This may not continue if stress in its financial sector increases. Austria is high in the rankings on debt held abroad but its fiscal situation is comparatively robust. That said, Austria has not been immune to market turbulence of its own, with the 10-year yield spread to Germany, currently about 40bp, having risen to more than 125bp in mid-2009 at the height of concern over its banking sector exposure to the CEE economies. France Germany Spain Italy Ken Wattret 7 May 2010 Market Mover 10 www.GlobalMarkets.bnpparibas.com
Market Stress Charts • Signs of stress in the euro govvie market are evident in sovereign debt and CDS spreads. Chart 1: 10yr Govvie Spread to Bund • There are also indications of bank funding tensions in countries such as Greece. • BOR-OIS spreads have begun to creep higher… • …Greek bank debt securities have sold off… • …and the market-priced probability of default for Greek banks has risen. • There have also been tentative signs of stress in the most recent ECB auctions. Source: Reuters EcoWin Pro Monitoring stress • Stress in the euro govvie bond markets has been evident for some time now and is widely gauged by looking at the spreads of countries’ benchmark bonds versus Bunds (Chart 1). • The CDS market, which gives us the cost of insuring against sovereign default, is also widely watched (Chart 2). • It is important, however, to also monitor stress indicators for countries’ banking sectors – funding problems for the sovereign typically have implications for banks’ funding ability in the market. • The Greek banking system has come under scrutiny for this reason in recent weeks. Data released by the Bank of Greece show a 5% fall in aggregate deposits of the financial sector (excluding the eurosystem) in the first three months of the year – some EUR 11bn (Chart 3). April may have seen this continue or accelerate. • The data may understate or overstate the deposit flight faced by Greek domestic banks because the statistics include the deposits of foreign banks with subsidiaries or branches in Greece. • Deposits are just one form of funding for banks. Money can also be raised from: 1) secured and unsecured borrowing from the market; 2) the issuance of debt securities; and 3) liquidity operations conducted by the European Central Bank. Equity represents more structural, longterm liquidity. 900 800 700 600 500 400 300 200 Chart 2: 5yr Sovereign CDS Irl 100 It Sp 0 Jan-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Source: Bloomberg 5yr EUR Sovereign CDS (bp) Chart 3: MFI (excl. Bank of Greece) Domestic Deposits (sectors other than central govt) 260 240 220 200 180 160 140 120 Greek Financial Institution Deposits (EURbn) 100 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 Source: Bank of Greece Gr Pt Eoin O’Callaghan 7 May 2010 Market Mover 11 www.GlobalMarkets.bnpparibas.com
Page 1 and 2: Market Economics | Interest Rate St
Page 3 and 4: UK: all eyes on the election US: re
Page 5 and 6: Event response The ECB is being ove
Page 7 and 8: Eurozone Periphery: Compare and Con
Page 9: over 20% in Q1) and, last but not l
Page 13 and 14: Chart 7: Greek Bank CDS* 900 Greece
Page 15 and 16: • The plan also contains a number
Page 17 and 18: Germany: Downs and Ups • The impa
Page 19 and 20: Retail sales data from month to mon
Page 21 and 22: On inflation, the statement was als
Page 23 and 24: quarterly average of 2.7% in the fi
Page 25 and 26: US Credit: Still the Recovery’s B
Page 27 and 28: Japan: Rising Chance of Sales Tax H
Page 29 and 30: BNP Paribas Surprise Indicator •
Page 31 and 32: UK headline After surprising to the
Page 33 and 34: US: Supply Could Affect Swap Spread
Page 35 and 36: steep curve is typically associated
Page 37 and 38: decline. We continue to maintain ou
Page 39 and 40: Chart 12: 90-119 Day Dlq for FRE 90
Page 41 and 42: the gamma sector for some time now.
Page 43 and 44: EUR: Limited Nervousness at ECB Ten
Page 45 and 46: with the big redemption (EUR 17.7bn
Page 47 and 48: measures are not promptly taken to
Page 49 and 50: Table 1: BNP Paribas' Inflation For
Page 51 and 52: Table 3: BNP Paribas' Inflation For
Page 53 and 54: Table 1: BNP Paribas Carry Analysis
Page 55 and 56: What’s the call? It is relatively
Page 57 and 58: Update on FIN SEN and FIN SUB 5/10y
Page 59 and 60: Germany 10y: Within MT falling wedg
Page 61 and 62:
Judging Currencies by Liquidity •
Page 63 and 64:
type of regulation would reduce mon
Page 65 and 66:
Euro Dives • The euro is collapsi
Page 67 and 68:
Currency Spot Trade Recommendations
Page 69 and 70:
Economic Calendar: 7 - 14 May (cont
Page 71 and 72:
Key Data Preview Chart 1: US Payrol
Page 73 and 74:
Key Data Preview Chart 5: UK Manufa
Page 75 and 76:
Key Data Preview Chart 9: French GD
Page 77 and 78:
Key Data Preview Chart 13: US Indus
Page 79 and 80:
Treasury and SAS Issuance Calendar
Page 81 and 82:
Central Bank Watch Interest Rate EU
Page 83 and 84:
FX Forecasts* USD Bloc Q2 '10 Q3 '1
Page 85:
RESEARCH DISCLAIMERS: IMPORTANT DIS
show all

Market Economics | Interest Rate Strategy - BNP PARIBAS ...

Create successful ePaper yourself

Delete template?

Save as template?