Draghi brought relief, but renewed pressure to be expected
Olaf Penninga, Raymond Verstraelen
Weekly update on eurozone sovereign markets by Robeco’s Rates team
Spanish and Italian spreads increased sharply in the beginning of the past week over headlines that a lot more Spanish regions would need to tap the new Spanish FLA fund. Spanish yields rose to more than 7.60% which pushed spreads near 6.40%. Verbal intervention by ECB president Draghi and board member Nowotny brought some relief to the market. Spanish spreads contracted by around 80 basis points to 5.30%. Italian spreads declined by 45 basis points to around 4.55%.
We did not change our positions this week which means that we maintained the neutral position in Italy and the underweight position in Spain. The fundamental problems in Spain and the limited access to capital markets remain the same. Although we agree with Draghi that the euro will survive, we expect renewed market pressure to emerge.
Other events this week:
- There have been a lot of headlines this week about possible policy responses to the intensification of the crisis. ECB board member Nowotny said he sees “pro arguments” in giving the ESM a banking license while ECB’s Draghi said that the ECB was willing to do “whatever it takes to preserve the euro”. The French newspaper Le Monde runs an article in which it cites “various sources” stating that the ECB and the EU are preparing coordinated action. According to the article, the EU firewalls would buy Spanish and/or Italian debt in the primary market while the ECB would buy debt on the secondary market to control rates. The German Bundesbank however confirmed its stance on a banking license for the ESM and told reporters that Draghi’s comments were not prior agreed upon with Germany.
- Ireland returned to the market this week with a bond exchange and an outright sale for a total of EUR 5.2billion. It switched EUR 1.0bn of existing 2013 and 2014 bonds in to a new 2017 and existing 2020 bond. It managed to sell EUR4.2bn outright in the two aforementioned bonds. This was the first bond issuance since 2010 and comes after a bond switch and a bill issuance earlier this year.
- Moody’s changed its outlook for the Netherlands, Germany and Luxembourg to negative while retaining the stable outlook for Finland. The main reasons for the change in outlook are the increased likelihood of a Greek exit, increased chance of more support for other sovereigns including Spain and Italy and the rising uncertainty regarding the outcome of the European debt crisis. France and Austria, which received a negative outlook in February already, will be assessed by the end of September given the new circumstances.
- After Valencia’s request for aid last week, it seems likely that between six and eight other regions will seek official support from the newly created Spanish FLA fund. Amongst the region mentioned are Catalonia and Andalucía.
- Troika inspectors returned to Greece last Tuesday to restart the bail-out program and assess whether or not Greece should continue to receive financial aid. According to newspaper Die Zeit, the European Union is looking at a renewed Greek debt restructuring to prevent bankruptcy. Reuters reported that one of the options considered would be a debt write down of 30% for the eurozone’s central banks. Senior German Government officials indicated that they will wait for the Troika report before any steps are taken.
- Italy issued EUR 2.5bn in 2-year zero bonds at a yield of 4.86%. Spain issued 3-month bills at 2.43% and 6-month bills at 3.69%.