Market Outlook - BNP PARIBAS - Investment Services India

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This section is classified as non-objective researchand 1(b) and 2(b) EUR 255bn, which coversEUR 850bn of debt (C).Compared to the refinancing needs of Spain and Italy(Table 3), (A) covers 46% of the refinancing needsover the next three years, (B) covers 88% of therefinancing needs over the next three years, and (C)covers all the refinancing needs up to the end of2015.In the (A) case, the EFSF would be leveraged by 1.3as it would be stretched in size to EUR 936bn fromthe initial EUR 726bn (not from the announcedEUR 780bn). In the (B) case, it would be leveragedby 1.6 as it would be enhanced to EUR 1.13trn, andin the (C) case it would be leveraged by 1.8 beingenhanced to EUR 1.3trn (all compared to theEUR 726bn guarantee commitments).What are the potential effects?We are rather sceptical on the effects of this type ofleverage in such an environment: psychology withregard to sovereign debt has changed since the ideaof sovereign bond insurance was first introduced.While it might have been efficient in restoringconfidence back in Q4 2010, systemic risk has risenconsiderably since then, and contagion to solideurozone governments has spread.However, on the positive side, we recognise thatproviding guarantees instead of loans would have thenon-negligible effect of easing the funding needs ofthe EFSF, and therefore decreasing issuanceexpectations. Depending on the portion of guaranteecommitments that would be used for sovereign debtinsurance, should this type of leverage materialise,EFSF debt issuance could be much lower than themarket expects. In addition, considering the recentofficial communication on plans to use short-termfunding, together with upcoming details on thefinancing of the aid to Greece (notably the financingof the defeasance assets), and the final amount to befinanced by the EFSF (likely to be smaller than theEUR 142bn taken into account in the aboveanalysis), issuance expectations have room todecline significantly from what is currently factored inmarket prices.Therefore, should a leverage of the EFSF throughthe use of sovereign bond insurance materialise, atightening of the EFSF from the current historicalhighs should be expected, based on lower issuanceexpectations. One way to play this possibility isthrough the following relative value trade: SellCADES 10y / Buy EFSF 10y. EFSF widened sharplyin September/October with uncertainty peaking withregard to the use of its balance sheet, the potentialleverage of the structure, future issuance, and themanagement of the aid to Greece. EFSF widened tothe extent of exceeding ASW levels of CADES, eventhough the French agency cheapened at the sametime: EFSF Jul-21 is currently 12bp cheaper thanCADES Apr-21 in mid-ASW and 15bp cheaper inmid-yield. Compared to CADES Oct-21, EFSF is 7bpcheaper is mid-ASW and 13bp cheaper in mid-yield.The advantage of this trade is that we don’t seefundamental reasons supporting a furthercheapening of the EFSF, relative to CADES, fromcurrent relative levels, while a richening of the EFSFis likely to come with a re-widening of theCADES/EFSF differential. Therefore, the trade isalso a protected way of playing a richening of theEFSF.Should the EFSF become a bank instead, we believethat this would be very much welcomed by themarket, thereby contributing to a turnaround inmarket sentiment. An improvement in marketsentiment is also likely to trigger a tightening of theEFSF, with a re-widening of the CADES/EFSFspreaddifferential.Camille de Courcel 20 October 2011Market Mover32www.GlobalMarkets.bnpparibas.com
This publication is classified as non-objective researchEMU Debt Monitor: CDS AnalysisChart 1: Belg/France CDS & Olo/OAT Spreads DivergingChart 2: Tighter Spain/Italy CDS, Stable Bono/BTP Spread1605Y CDS and cash spreads905Y CDS and cash spreads1200110014010001201008040-109008007006006040200Apr-11 May-11BEL/FRAJun-11BEL/FRAJun-11cashJul-11 Aug-11FRA/NETHAug-11 Sep-11FRA/NETHOct-11cash500-60400300-110200Apr-11 May-11 May-11 Jun-11 Jul-11 Aug-11 Aug-11 Sep-11 Oct-11 Oct-11SPA/ITA SPA/ITA cash POR/SPA POR/SPA cashWith the exception of France CDS, most AAA CDS have been fairly stable over the past week. What is even more surprising isthat the sell-off on France has been more pronounced on cash than CDS, with France CDS basis tightening by 8bp and byalmost 16bp versus the Germany CDS basis. According to our model, almost 100% of the rise in France CDS comes from therise in the liquidity and risk premium, which is now around 65bp. Regarding AAA CDS spreads, the expected outperformanceof Austria versus France occurred and was more significant than expected (up to 25bp on 5y ATS/OAT versus 15bpexpected). Among AAA/AA CDS differentials, Finland remains the cheapest bond versus CDS both in absolute and relativeterms (we like 15y Fin versus DSL, see next section). As Chart 1 illustrates, France/Belgium CDS has tightened back while theBTAN/Olo spread widened back close to September’s highs. In terms of trades, the safest way to play a recovery ofBelgium seems to be through 2y/5y flatteners on the Olo curve. Finally, as Chart 2 shows, Italy/Spain CDS spread hasalso decoupled from cash over the past couple of weeks, with the former tightening by 30bp while the 5y cash spread widened10bp.Buying Italy CDS basis in the low 100s is one way to exploit the current cash/CDS decoupling. The trade would also benefitfrom a likely renewal of SMP activity next week (buying has been very subdued for two weeks, at below EUR 2.3bn). A returnto 130-140bp is expected.All charts source: BNP ParibasCDS Table and Stats*5y FIN NETH FRA AUS BEL ITA SPA POR IRECDS 74 100 187 155 299 446 375 1185 803CDS Weekly change 1 13 23 -1 11 21 17 -33 56cash -41 -43 20 8 167 343 255 1327 541Basis 115 143 168 147 132 103 120 -143 262Basis Box vs Gy -60.0 -32.5 -7.8 -28.5 -43.8 -72.5 -55.5 -318.0 86.8Average -40.9 -37.3 7.4 -18.9 -17.5 -51.7 -22.0 -202.7 -127.8Max -25.6 -22.2 36.7 3.1 11.9 3.2 12.5 -51.9 165.1Min -74.7 -55.4 -10.3 -40.8 -57.8 -113.6 -66.3 -378.3 -417.4Z score** 1.59 -0.69 1.33 1.12 1.47 0.83 1.72 1.88 -1.21Change to 31/12/2010 CDS Cash2y 5y 10y Current Min/Max z-score Current z-scoreFIN 35 43 46 AUS/BEL -144 -152/-66 -1.9 -159 -1.7NETH 40 45 50 BEL/FRA 112 56/131 2.0 148 1.2FRA 63 85 84 FRA/NETH 87 35/104 1.0 62 4.4AUS 49 59 64 FRA/FIN 114 37/114 1.8 61 4.7BEL 83 89 84 ITA/B EL 147 5/249 0.8 176 0.9ITA 249 210 184 AUS/FRA -32 -58/-4 -1.0 -12 -4.1SPA 57 28 17 SPA/IT -71 -104/118 -1.5 -88 -1.6POR 1021 686 525 POR/SPA 810 361/927 1.1 1072 1.5IR E 343 195 106 IR E /PO R -382 -524/35 -1.5 -787 -1.8GRE 7531 4754 3661 GRE/IRE 4968 523/5427 2.1 2166 2.0All charts source: BNP Paribas * using Wednesday 19 October closing** z score measures the deviation from six-month rolling average CDS/cash basis of the country versus Germany, expressed in numbers of standard deviations. Anumber above 1.50 means that the cash is trading historically cheap compared with its average basis level.Eric Oynoyan / Ioannis Sokos 20 October 2011Market Mover33www.GlobalMarkets.bnpparibas.com
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Page 10 and 11: UK: Top Of The Hill• The Septembe
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Page 16 and 17: Japan: Real Reason for ‘Turning J
Page 18 and 19: Political question of whether peopl
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Page 42 and 43: Table 2: BNP Paribas' Inflation For
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Page 54 and 55: Economic Calendar: 21 - 28 October
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Page 68 and 69: Economic ForecastsGDPYear 20112012(
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