Market Outlook - BNP PARIBAS - Investment Services India

EUR: Peripheral EGBs Under Pressure
• The EUR 8bn syndication of the new 5y GGB
was not enough to change the climate for Greek
spreads, which are continuing to hit new highs.
The Greek PDMA announced a second
syndication to take place in February (new 10y)
for EUR 3-5bn…
• …thereby leaving no breathing space for
GGBs after the heavy supply of this week. The
Greek MinFin also announced a roadshow to the
US and Asia next month in order to drum up
foreign investors’ interest in GGBs.
• Contagion to other eurozone countries,
especially Portugal, is growing fast, thus making
a default scenario even more unlikely. Ireland
has been outperforming so far, and we believe
that this cannot be sustained. Underweight
Ireland and Portugal.
Chart 1: GGB/Bund Spread & vs Average EGBs
5.0
4.5
4.0
3.5
3.0
2.5
2.0
1.5
1.0
0.5
0.0
Jun-08 Sep-08 Dec-08 Mar-09 Jun-09 Sep-09 Dec-09
Source: BNP Paribas
Ratio of Greek Spreads vs Average EGB Spread
Ratio of Greek Spreads vs Average Peripherals
10y GGB/Bund (ASW) RHS
Chart 2: % of 2010 Total Issuance Completed
40%
35%
30%
% of Forecast 2010 Supply Completed
800
700
600
500
400
300
200
100
0
25%
Greece: EUR 8bn Syndication was not enough
The first big syndicated GGB (new 5y) issuance
came earlier than we expected as the Greek PDMA
completely changed its stance and moved from the
uncertainty of whether or not to make a second
private placement or not to the first GGB syndication
(EUR 8bn with the order book reaching EUR 25bn!)
and the announcement of a second one in February
(new 10y). First, we believe that this change in tone
by the Greek PDMA is a good thing, since it
demonstrates some confidence that the country is
able to fund itself. Private placements very often
send a wrong signal to investors as they indicate that
the country is reluctant to go to the primary market to
borrow. What is even worse than actually doing a
private placement though is to show uncertainty on
whether you will do it or not; from this perspective
also, the change in the PDMA’s tone is considered a
positive development.
Once the order book had reached EUR 25bn,
Greece decided to issue EUR 8bn instead of EUR 3-
5bn initially targeted, at a spread of midswaps
+350bp from initial guidance of +375bp. Common
sense was that this would buy at least some time for
Greece and, if anything, could create some
downward pressure on spreads. Of course, as
Moody’s correctly put it, this does not change the big
picture and the structural fiscal problems of Greece
are here to stay, but nevertheless it could have
erased some of the risk related to doubts on
Greece’s ability to fund its debt that must have been
incorporated into the extremely wide levels of Greek
spreads. However, spread compression did not occur
20%
15%
10%
5%
0%
Source: BNP Paribas
Greece Ireland Italy Portugal Spain
Chart 3: Contagion to Other EGBs (ex-GGBs)
55
40
25
10
-5
Year-to-Date
Since Nov 17th
AUS BEL ITA POR SPA NETH FRA IRE FIN
Source: BNP Paribas
Iberian Contagion
Irish Outperformance
and the new 5y GGB yield rose 40bp in its first day of
trading, while the 10y GGB/Bund spread is more
than 70bp wider this week alone. Chart 1 shows the
new historical wides of the 10y GGB/Bund spread,
along with the increasing ratios of Greek spreads
over average EGBs (now at 5x) and over average
peripherals (now at 3x).
The next reasonable questions to ask are what
happened to the EUR 17bn that was not allocated
during the syndication and why did the Greek PDMA
not leave some breathing space to GGBs before
announcing its plans for a second syndicated deal of
Ioannis Sokos 29 January 2010
Market Mover, Non-Objective Research Section
36
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