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

• There is little visibility on the costs Greek banks
face in the secured or unsecured funding
markets. Broader measures of funding stress,
such as BOR-OIS in the eurozone as a whole,
have been inching up in recent weeks (Chart 4).
However, from a long-term perspective, they are
still subdued relative to the levels recorded
during the financial crisis (Chart 5). Note that we
use Euribor future contracts rather than spot
fixings because, as a traded security, they are
more liquid.
• The impact on Greek bank debt securities differs
by instrument, but there is evidence of a parallel
sell-off (Chart 6).
• In part this reflects a rising expectation of default
– evident in rising CDS prices for single name
banks (Chart 7). There has also been a large rise
in CDS for Portuguese banks (Chart 8) with
smaller gains for Irish and Spanish institutions
(Charts 9 and 10).
• Indicators of funding conditions at ECB liquidity
operations are presented at an aggregate level.
As highlighted by our interest rate strategists,
data on the recent ECB auctions have shown
some possible signs of a modest increase in
stress.
• The first variable rate 3m tender since the end of
2008 was conducted at the end of April. Despite
a generous EUR 15bn allotment scheduled, the
average bid rate was dragged up to 1.15% with
at least one bid recorded at 1.5%, 50bp above
the minimum bid rate and just 25bp below the
cost of using the lending facility.
• In addition, at the most recent main refinancing
operation, despite over EUR 200bn of excess
liquidity in the eurosystem, the allocation
increased to EUR 90bn, EUR 15bn up on the
previous week, with 76 bidders –10 higher than
the previous week.
• While this needs to be kept in perspective – the
number of bidders was in the hundreds as
recently as the end of 2009, the results of future
auctions are worth keeping an eye on.
• Some signs of rising tensions are evident in
additional measures such as the volatility implied
in swaption contracts and swap spreads.
In sum, there are increasing signs of tension not just
in the sovereign funding markets, but in the banking
sector too. This is inevitable – the financial crisis
demonstrated that it is the sovereign that ultimately
back-stops the financial system. Sovereign risk is
already wrapped up with banking sector risk in
Ireland, for example. This is why sovereign funding
crises are so dangerous – pressures on liability
refinancing ripple beyond the obligations of the state.
Chart 4: BOR-OIS: Rolling Euribor Contracts I
50
45
1st position
40
35
30
25
3rd
20
2nd
15
BOR (Euribor Futures) - OIS Spread
10
5
0
Jun-09 Aug-09 Oct-09 Dec-09 Feb-10 Apr-10
Source: Bloomberg
Chart 5: BOR-OIS: Rolling Euribor Contracts II
160 BOR (Euribor Futures) - OIS Spread
140
1st position
120
100
2nd
80
60
40
3rd
20
0
Jan-08 May-08 Sep-08 Jan-09 May-09 Sep-09 Jan-10 May-10
Source: BNP Paribas
Chart 6: Bank Cash Bullet Bonds
105 EFG 4 & 3/8% 02/2013 Alpha 3 & 7/8% 09/2012
100
95
90
85
NBG 3 & 7/8% 10/2016
80
75 Bullet Cash Bonds
Piraeus 4% 09/2012
70
Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10
Source: BNP Paribas
Eoin O’Callaghan 7 May 2010
Market Mover
12
www.GlobalMarkets.bnpparibas.com