Market Outlook - BNP PARIBAS - Investment Services India

EUR 3-5bn (new 10y) in February? Compared to last
week, the situation looks better since Greece has
already completed 22% of its total 2010 funding
needs (Chart 2), while some supportive statements
by EU and ECB officials hit the headlines this week.
Mr. Trichet said that he trusts that the Greek plan is
realistic and also necessary, and Mr. Juncker said
that the Greek plan is a step in the right direction. Mr.
Soros and Mr. Pryce (Fitch Ratings) were also
positive on Greece, in sharp contrast to Mr. Roubini’s
statement that “Greece is already bankrupt”. Despite
all these comments, Greek spreads exploded once
again and the Greek PDMA may need a coupon of
7% in its upcoming 10y syndication.
Chart 4 shows the bond and T-bills redemptions plus
the coupon payments that lie ahead for Greece,
making it obvious that April and May will be the
heaviest months. This explains why the Greek
FinMin said that he plans 50% of 2010 issuance to
take place in Q2. When looking at the maths of it, the
Greek government has debt obligations of EUR
27.2bn in the period from 1 Jan until end-May, and it
has issued EUR 13.6bn so far (EUR 2bn private
placement, EUR 3.6bn of T-bills and EUR 8bn of new
5y GGB), meaning there is a need for a further EUR
13.5bn before the end of May. Of this EUR 27.2bn,
EUR 16.7bn corresponds to bond redemptions, EUR
4.8bn to coupon payments and EUR 5.7bn to T-bill
payments, which are expected to be rolled forward
with new T-bills. Therefore, under a rough
approximation, we could say that a further EUR
11.5bn in GGB issuance is needed before the end of
May.
As spreads keep widening, the scenario of some
form of external help (bailout plan) will gain publicity,
and the whole subject usually ends up with the
standard debate between the no bailout clause of the
Maastricht Treaty and the window for some form of
financial aid that is allowed for countries in trouble
due to crises. Both Greece and the EU will continue
to say that there is no need for a bailout and that
Greece will find its own way out of the current
situation through the implementation of the Growth
and Stability Plan that will be judged at the EcoFin
meeting on 16 February. Before that though, at the
beginning of February there will be a report by the
European Commission on the Greek Growth and
Stability plan.
EGBs: Contagion from Greece weighs on Iberia
What we’ve seen in the last weeks is an acceleration
of the contagion effects from Greece to other
peripheral countries. Chart 3 shows the year-to-date
and 17 November (i.e when the Greek story started)
to date widening in all EGB spreads except for
GGBs. Portugal and Spain have seen their spreads
to Bunds widen aggressively in 2010, by 35bp and
Chart 4:Greek Debt Expiring in 2010 & Coupons
9
7.5
6
4.5
3
1.5
0
Bond Redemptions
Coupon Payments
T-bills Redemptions
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: BNP Paribas
120
110
100
90
80
70
Chart 5: 10y IRE/POR/SPA/ITA vs Bunds
10y Yield Spreads vs Bunds
60
ITA
POR
50
SPA IRE (RHS)
40
Oct-09 Nov-09 Dec-09 Jan-10
Source: BNP Paribas
24bp respectively. BTPs have been more resilient
with a 15bp widening, while the biggest surprise
comes from Irish bonds, which have stretched by
only 7bp. Ireland was praised by the EU and ECB for
the harshness and decisiveness of its fiscal
measures after deciding to cut spending by EUR 4bn
in 2010. While this is certainly a step to the right
direction, it does not justify such an outperformance
versus other peripherals. We thus choose to
underweight Irish bonds at these levels.
Portugal has been the main underperformer, and
from Wednesday this week it has an extra reason to
be so as the government announced a higher than
expected deficit of 9.3% for 2009, with a plan to
reduce it only to 8.3% this year. PGBs widened by
11bp the following day, while Portugal has only
borrowed EUR 1bn so far in 2010, putting more
pressure on PGBs. We therefore choose to
underweight PGBs too. Chart 5 shows the 10y
spreads to Bund of Spain, Portugal, Ireland and Italy.
The accelerating contagion of the Greek fiscal
problems to other countries with significant deficits
and high debt/GDP ratios is one more reason why a
default in Greece is an extremely unlikely scenario.
Greece might represent only 2.7% of the eurozone’s
GDP, but the nature of its problem allow the
aforementioned contagion to other peripheral
countries to grow. The upcoming assessment of the
Growth and Stability plan by the European
Commission and the EcoFin will be crucial.
200
190
180
170
160
150
140
130
120
110
100
Ioannis Sokos 29 January 2010
Market Mover, Non-Objective Research Section
37
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