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Yesterday, bonds issued by Walt Disney set new records for corporate debt, with the lowest-ever coupons achieved for five-, ten- and 30-year bonds. Disney’s ten-year tranche, with a coupon of 2.75%, boasted a yield roughly the same as French sovereign bonds.

As investors seek safe havens amid market turmoil, yields on US Treasuries have plunged, giving intrepid corporate borrowers in America an opportunity to pitch for low-cost, long-term funding. Coca-Cola and AT&T also issued bonds this week at record-low yields for the companies.

As Treasuries, gold, the Swiss franc and other perceived low-risk assets attract investors, this got us thinking about the creditworthiness of the world’s strongest corporate borrowers vis-à-vis beleaguered sovereigns. At the close of trading yesterday, there were 25 companies with narrower credit default swap spreads than the top-ranked sovereign, Norway. In the minds of CDS traders, Norway is roughly as creditworthy as Walt Disney  (is Mickey’s Magic Kingdom now considered a safe haven?). The map below shows the approximate corporate equivalents to a selection of European sovereigns, according to the CDS market.

A new survey of executives by the Economist Intelligence Unit adds another perspective to the all-but-inevitable event roiling financial markets: a Greek default. Nearly three-quarters of more than 300 executives polled by the EIU over the past week believe that Greece will eventually default on its debt. (For the full survey results, visit the EIU’s Business Research site.)

On Monday, euro area finance ministers released a statement calling for a “broader and more forward-looking policy response” to Greece’s ongoing struggles with its crushing debt burden. On the same day, Greek prime minister George Papandreou added his thoughts on the matter, warning that “if Europe does not make the right, collective, forceful decisions now, we risk new, and possibly global, market calamities due to a contagion of doubt that will engulf our common union.”

In the EIU’s survey, a small but noteworthy minority of respondents, 12%, think that the impact of a Greek default will be of a similar scale and magnitude of the collapse of Lehman Brothers in 2008. A larger share of executives, 47%, predict a significant, long-lasting impact, but with the pain largely confined to the euro area. The remaining respondents either expect little impact or weren’t willing to hazard a guess.

With Greece’s benchmark bonds trading at half of face value, and spreads for Spain and Italy recently touching euro-era highs, officials are scrambling to stem the contagion from the monetary union’s troubled periphery. There is talk of an emergency euro summit on Friday, when release of the EU’s bank stress tests could destabilise markets further. But true to form, euro area officials are finding it difficult to come to an agreement on whether to meet or not.  

Analysts are poring over new statistics on debt exposure from the Bank for International Settlements released today. As has become customary with each quarterly release of this data, the report’s (virtual) pages are flipped directly to the section detailing the size of banks’ portfolio of bonds issued by governments on the euro area’s troubled periphery.

French and German banks are the most exposed, by far, to troubled government debt. Although banks have been reducing their exposure—the value of debt from Greece, Ireland, Portugal and Spain held by foreign banks fell by 35% last year—significant holdings remain. German banks, for example, were sitting on more than 40% of the US$54bn in foreign-held Greek government debt at the end of 2010.

The inevitable restructuring of Greek debt will be painful for lenders, although the severity will vary according to the method employed. In the meantime, attempts to cajole banks into a voluntary refinancing of Greece’s daunting debt pile (along the lines of the “Vienna Initiative” in central and eastern Europe) will continue, despite a glaring lack of incentives for lenders to take part.

The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.

Reeling from the financial crisis and facing potential funding shortfalls, western banks turned to sovereign wealth funds (SWFs) for support during the credit crunch. In 2007 and 2008, these funds, mainly from Asia and the Middle East, pumped some US$70bn into the ailing institutions.

SEND HELP: Spain's prime minister meets China's vice premier on January 5th 2011

On state visits around Europe this month, Li Keqiang, China’s deputy prime minister, made headlines by suggesting that China stood ready to support the debt of the euro area’s troubled peripheral members. This, along with other sovereign investors’ recent history of dabbling in distressed assets, suggests that SWFs may play a role in alleviating the euro area’s current woes.

With more than US$4trn in assets, according to the SWF Institute, the funds’ collective might would be more than sufficient to cover the existing support facilities for Greece and the joint EU-IMF facility for other euro area economies in need (already tapped by Ireland). But how realistic is this?

Read more at Financial Services Briefing: “Sovereign crisis, sovereign solution” (January 12th)

The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.

Not the best time to sell sovereign debt in southern Europe

Even for faraway Argentina, southern Europe was the centre of the action on sovereign debt on May 3rd. Amado Boudou, Argentina’s economy minister, kicked off in Rome the country’s offer to swap defaulted bonds worth nearly US$30bn, an effort that could bring to an end its exile from global financial markets since its default in 2001. This was the same day that markets reacted to the euro zone and IMF rescue of Greece, a crisis that threatened to drag a whole string of southern European countries into their own sovereign meltdowns.

Read more at Financial Services Briefing: “An offer on the table” (May 3rd)

The plight of Greek banks has been a frequent topic of conversation on this site in recent weeks. Now that the country has announced it will draw on emergency aid from other euro-area countries and the IMF, these lenders—who are heavily exposed to rapidly souring sovereign debt and particularly reliant on the ECB for liquidity—have come under further pressure.

In late trading today, the spread on credit default swaps for Greek sovereign debt soared above the spreads for swaps written on the country’s largest banks. This says less about the safety of the banks than it does about the scale of the Greek state’s fiscal distress.

A Reuters story suggests that German government officials are taking steps to “identify speculators in Greek debt to try to prevent them from profiting unduly from any bailout.” The measures that could be taken to prevent such profits are unclear, and the article somewhat conflates investors in sovereign debt with those who invest in credit default swaps linked to sovereign debt.

If the purported goal of the investigation is to crack down on CDS speculators, new data from the Bank for International Settlements should give officials pause. In its latest quarterly banking review, published today, the organisation notes that the net exposure of investors to the sovereign CDS of beleaguered euro area economies is a tiny fraction of the actual sovereign debt of those countries. Thus, assuming CDS traders are largely to blame for pushing up the cost of countries’ refinancing is a rather heroic assumption.

Concerns about derivatives markets’ growing influence over the underlying securities upon which they are based have been around for a while. In the context of CDS, these concerns generally surface when a scarcity of corporate debt threatens the settlement of linked derivatives during credit events (defaults, restructurings and the like). But the notional amount of CDS written on sovereign issues pales in comparison to the value of the underlying debt, so attacking derivatives “speculators” on this front seems misguided.

What’s more, a recent Moody’s report suggests that banks may be buying more protection against sovereign default by Greece, Portugal and other teetering economies for reasons not directly related to growing worries about sovereign default. Derivatives linked to some corporate and sub-sovereign borrowers may not exist, so lenders choose instead to buy “protection on the sovereign on the assumption (hope?) of strong correlation between it and the entity to which they have the long credit exposure,” Moody’s writes. Of course, such correlation could be spurious, leaving banks with imperfect hedges and government officials with misguided conspiracy theories.

Around half of European banks’ €3.3trn (US$4.5trn) of debt will mature over the next three years, with €550bn coming due this year alone. According to new research from Morgan Stanley, the cost of rolling over this debt will be more expensive than in the recent past.

Concerns about sovereign fiscal health are “increasing the ‘risk’ in the ‘risk-free’ rate,” Morgan Stanley argues. Some €1.6trn in gross government debt issuance this year also risks crowding out private-sector capital. In addition, banks shortened the terms of their borrowing during the financial crisis, so extending maturities will come at a cost. Greater issuance of non-guaranteed debt will also push up costs; in the fourth quarter of last year, government-guaranteed issues fetched spreads 40 basis points lower, on average, than the non-guaranteed variety. Even without widespread hikes in central banks’ policy rates, private-sector lenders’ cost of capital is on the rise.

The majority of data and analysis at Financial Services Briefing is available only to subscribers. Each week, a small share of content from the service is made available to non-subscribers.

Concerns about Spain’s sovereign solvency overshadowed a strong set of fourth-quarter earnings from Santander. The resilience of the country’s largest bank in the face of major headwinds is generating praise, but also scepticism.

The sceptics have latched on to rumours about the potential listing of minority stakes in Santander’s US and UK arms. After all, in 2009 the bank was able to offset a spike in loan-loss provisions with capital raised from the listing of its Brazilian unit and sundry other one-off transactions. With worries about Spain’s moribund economy at “fever pitch,” according to a Moody’s report, the listing rumours persist despite denials from Santander’s management.

Even if Spain’s largest bank recorded a 13% rise in net income for the fourth quarter, easily outpacing its nearest rival, BBVA, it seems that opinions about Santander’s prospects are being driven as much by sovereign fiscal concerns as the bank’s own balance sheet.

Read more at Financial Services Briefing: “Santander under scrutiny” (February 11th)

Analysts from Egyptian investment bank EFG-Hermes made waves recently with a weighty report that suggested the debt held by Dubai’s government and government-related entities could be up to US$170bn, well above previous estimates. The bulk of this debt is owed by the array of emirate-controlled holding companies, property developers and investment firms that make up “Dubai Inc.” Some of the weaker members of this club have already had high-profile struggles repaying their debts.

The prospect of a potentially larger debt pile facing increasingly wobbly borrowers seems like bad news for local lenders. Indeed, listed banks in Dubai and—to a lesser extent—Abu Dhabi are valued at a discount to their neighbours. (In the chart, P/B is the price-to-book ratio and ROE is return on equity.)

Although a discount is warranted due to lower profitability and a weak economic outlook, EFG-Hermes nevertheless considers the UAE banking sector the “most attractively valued market in the region”. If investors truly are rediscovering an appetite for risky assets, there is no sterner test than Dubai bank shares.

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