Wednesday, 14 March 2012

SOVx Western Europe - And Then There Were 14...

"Ten little Indian boys went out to dine; One choked his little self, and then there were nine. Nine Little Indian boys sat up very late; One overslept himself and then there were eight. Eight little Indian boys traveling in Devon; One said he'd stay there and then there were seven. Seven little Indian boys chopping up sticks; One chopped himself in halves then there were six. Six Indian boys playing with a hive; A bumble-bee stung one then there were five. Five Indian boys going in for law; One got in Chancery then there were four. Four Indian boys going out to sea; A red herring swallowed one then there were three. Three Indian boys walking in the zoo; A big bear hugged one then there were two. Two Indian boys sitting in the sun; One got all frizzled up then there was one. One Indian boy left all alone; He went and hanged himself and then there were none."
- Agatha Christie, And Then There Were None, Ch. 2

Following the "selected default" of Greece and the "voluntary" restructuring, given the auction is taking place on the 19th of March, followed on the 20th of March by the roll of credit indices (every 6 months for indices, every three months for single names), the Current SOVx series 16, is now made up of 14 names instead of 15.

The SOVx cliff drop with the Greek exit from the 5 year index - source Bloomberg:

So courtesy of school drop out Greece, Itraxx SOVx 5 year index is trading closely to Itraxx Financial Senior 5 year index for now until roll day on the 20th of March(25 European banks and insurance single names CDS) - source Bloomberg:
20 bps apart between both credit indices as of the 13th of March.

The remaining members of the Itraxx SOVx 5 year index series 16, as of 13th of March - source Bloomberg:

Given the current Portuguese financial rescue package of May 2011 of 78 billion euros for 2011-2014 is most likely not sufficient, there may be trouble ahead, hence our reference to Agatha Christie's masterpiece, yet another rambling of ours. Risks are as follows:
-further overshooting of deficits
-funding shortfalls for Portugal.

Troika is planning for Portugal to access market funds in late 2013. Maybe it is time for the Troika to pay a close attention to what the CDS market is telling them: Portugal's 5 year CDS is still hovering above 1250 bps (5 year implied probability of default of 64.75% according to CDS data provider CMA as of the 14th of March 2012).

As indicated by Amundi Asset Management in their recent Cross Asset Strategy Monthly report:
"The European Commission recently handed down its verdict, and there are no fewer than twelve countries that are subject to risk: Belgium, Bulgaria, Denmark, Spain, France, Italy, Cyprus, Hungary, Slovenia, Finland, Sweden and the United Kingdom. Add to these countries those that are already receiving special assistance (Greece, Ireland, Portugal and Romania), and nearly two-thirds of European Union countries are receiving special attention. As you can see, these are not isolated cases, but indeed the vast majority of the Union."

In relation to lucky number 13, namely Portugal (BB- at rating agency S&P), Amundi also indicated the following in relation to the insufficient financial rescue package:
"The gross financing requirement for 2011-2014 as estimated by the IMF was already higher in December 2011 than in May:
In December 2011, according to the IMF, Portugal’s gross borrowing needs over the programme period of 2011-2014 were larger than foreseen in May 2011 (EUR163bn vs EUR152bn) partly due to slower than forecast GDP growth over 2012-2014. The IMF bridged this gap in its December 2011 report on Portugal via larger privatization receipts(EUR5.6 vs EUR5bn, despite undershooting in 2011) and much larger market access via short-term borrowing. Also, according to the June report, the general government debt was expected to peak at 115.3% of GDP in 2013 while the December report modified this to peak at 118.1% in 2013.

Since the publication of the IMF December report, the 2011 fiscal deficit has overshot.
General government debt % GDP Portugal’s fiscal deficit in 2011 initially targeted at 5.9% of GDP was higher -- at 7.5% if GDP -- if we exclude EUR5.6bn or 3.3% of GDP of oneoff revenues from the seizure of pension fund assets from three banks. And this despite the fact that the contraction in GDP in 2011 was less than initially expected (-1.5% versus -2.2%). The deficit number for 2011, after the pension maneuver, was 4% of GDP. However, this means that the 2012 deficit target is likely to be overshot since it would be very hard to bring down the deficit from 7.5% in 2011 (excluding one off) of GDP to 4.5% in 2012."
Oh dear...

And Amundi to conclude:
"While 2012 represents a relatively safe window in terms of default risk for holding Portuguese debt maturing over the next twelve months, we see trouble ahead in terms of funding shortfalls due to overshooting of deficits. However, the situation is by no means comparable to the gravity of the Greek problem because of a different political context and slightly more favourable debt burden. A reminder: Greek debt to GDP is currently(before PSI) over 160% versus 107% for Portugal.
We expect that further shortfalls may induce the IMF to put in place a second package before the current one expires in 2014, especially since for the time being the IMF seems to be satisfied with the progress being mage by Portugal. Moreover, the Troika will surely be unwilling to confront another PSI unless absolutely necessary. Until then, the ground will remain wobbly..."

Most interesting points made by Amundi Asset Management in their recent report in relation to our European Flutter's "issues list" are as follows:
"It is very interesting to see that a good number of sensitive issues from the 1990s have resurfaced over the past three years – more specifically:
• The lack of budget and tax harmonisation, which made the European Monetary Zone an incomplete monetary union;
• The lack of a federal budget, which prevented automatic transfers from growth areas that were in good financial health to disadvantaged areas;
Unwillingness to build true federalism, because of the desire to conserve a measure of autonomy and sovereignty, an indispensable element in the absence of a central government;
• The ECB's inflexibility, and specifically the unified target and mission (the currency's internal value, i.e. inflation);
Convergence criteria based essentially on public finance criteria (public deficit and debt). Making this a virtually exclusive factor in the health of an economy relegated essential criteria such as the job market, competitiveness, and account balances to the background.
The logic of the Stability Pact appeared inappropriate. More than that, it enshrined budgetary rigour as the only means of correction and promoted pro-cyclicality for certain economic policy instruments whose effectiveness, indeed, lies in their anticyclical nature."

"Self-preservation's a man's first duty. And natives don't mind dying, you know. They don't feel about it as Europeans do."
- Agatha Christie, And Then There Were None, Ch. 4

Stay tuned!

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