MARKET MOVER - BNP PARIBAS - Investment Services India

Next we compare Ireland and Portugal and try to
identify the potential threats and opportunities in the
coming months. Starting with the funding needs and
issuance calendar in these countries, Ireland has
already reached 2010’s funding needs and has
actually started pre-funding for 2011. Despite that,
NTMA officials have stated that there is no plan to
skip an auction and thus we could have some more
prefunding in the remainder of the year, most likely
two more auctions (depending on market conditions).
On the other hand, Portugal has completed 90% of
its issuance target (EUR 19bn of EUR 21bn) and we
expect another EUR 2bn before year-end. Hence,
funding pressures will be limited in the remainder of
the year while the main focus will be on the budget
reports and the projections for 2011 funding needs.
In terms of fiscal consolidation, Portugal appears to
be on a weaker path. Chart 4 shows the Portuguese
cash-basis budget balance, where the development
has been disappointing so far according to our
economists. Over the first eight months of this year,
the deficit was EUR 0.5bn larger than over the same
period last year. On the contrary, in Ireland, there
have been many concerns lately with respect to the
massive amount of government guaranteed bonds
that mature in September. This has led to an
acceleration of the widening of Irish spreads in
combination with the developments on ANGIRI. We
don’t think that these redemptions will cause any
significant problem for the Irish banks and we expect
some risk to be priced out of Irish Gilts once
September has passed. The key statistic to watch in
the near term will be the ECB liquidity absorbed by
Irish banks, where we could see a spike in
September’s data. This spike has already taken
place in Portugal: as Chart 5 shows, the dependence
of Portuguese banks on the ECB has exploded since
April. This is a very worrying trend that could create
more pressure on PGBs as the ECB’s exit strategy
has already become a hot topic in the market.
Chart 6 shows the Irish/Portuguese spreads in all
sectors. The 2y IRE/POR spread has widened the
most from August lows but remains the tightest
sector versus the rest. An overshooting can be seen
on the 5y sector but this is also affected by the fact
that there has been no new 5y benchmark in 2010 in
either country. When we look at the non-parametric
conditional distribution of the 2y IRE/POR spread
based on the latest trading range of the 10y spread,
it is clear from Chart 6 (bottom) that 2y spreads are
on the wide side.
All in all, BTPs remain our favourite pick across the
periphery. We prefer Irish Gilts to PGBs, especially
after September and the end of the government
guaranteed bond massive redemptions. However,
Chart 4: Portugal – Cash-Basis Budget Balance
0
-2
-4
-6
-8
-10
-12
-14
-16
Cash Balance
(EURbn)
2010
2009
Consistent with the
Year-End Target
2007
2006
2008
Jan Feb Mar Apr May Jun Jul Aug Sep Oct Nov Dec
Source: BNP Paribas
Chart 5: ECB Liquidity & Portuguese Banks
60
50
40
30
20
10
0
5 5 5 5 5
Jan-09
Feb-09
Mar-09
Apr-09
Source: BNP Paribas
MROs & LTROs
May-09
Bank of Portugal B/S
11 9 9 9 11 12 16 15 15 15 18 36 40 49
Jun-09
Jul-09
Aug-09
Sep-09
excessive volatility makes relative value trades look
too risky as liquidity remains very thin.
Oct-09
Nov-09
+175% Increase
Chart 6: IRE/POR Spreads and Conditional
Distribution of 2y Spreads on 10y Current
Levels
150
100
50
0
-50
-100
-150
-200
Jan-10 Feb-10 Mar-10 Apr-10 May-10 Jun-10 Jul-10 Aug-10 Sep-10
0.035
0.03
0.025
0.02
0.015
0.01
0.005
0
10y IRE/POR
2y IRE/POR
Dec-09
Jan-10
Feb-10
Mar-10
15y IRE/POR
5y IRE/POR
-80 -60 -40 -20 0 20 40 60
Source: BNP Paribas
Conditional Distribution of 2y IRE/POR Spreads on current
range of 10y spreads
Apr-10
May-10
Jun-10
Jul-10
At current level they
are on the wide side
Ioannis Sokos 23 September 2010
Market Mover, Non-Objective Research Section
28
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