Wednesday, June 24, 2015

European Debt Crisis Redux, (And Other Things)

Very recent news flows has not been very positive from the Greek Bailout negotiations.
In this context, it is interesting to re-run the kind of analysis every one had tattooed on their forehead back in 2010 and again in 2012. Sovereign debt ownership, focusing on the southern block.
Portuguese bonds market ownership is quite dominated by foreign players. According to Bloomberg, banks and insurance companies own around 16% of total outstanding, of which around 13% is foreign owned. Another approx 7.5% belongs to the asset managers, which is mostly foreign. So total approximately 20% owned by foreign players, who can become jittery in case of an unexpected outcome in Greece. For Italy, total banks and insurance own 25% of outstanding, but only 7% foreign owned. Another 6% spread among asset managers without much concentration. Similar figures for Spain is around 8% for banks and insurance, and another 2% from asset managers, so around 10%.
Portugal GDP is not in the momentum we see in Spain (not even Italy). On the other hand, unemployment is far better and both have elections coming up this year. Incidentally we have seen a lot of spread tightening in Portugal bonds compared to both Italy and Spain since middle of this month.
Definitely something to watch out for.
Separately, the data flows from UK on the other hand has been solid lately. An august hike? Not likely, but BoE cannot trail the Fed for long. We have a slight re-pricing of Fed hike towards Mar 16, and BoE is priced in around Jun 16. Fair, possible. But what is surprising is the spread of the real rates. Historically the US and UK inflation spread has been on an average 0bps since 90s till before the Crisis, and 120bps for last few years. Sure Euro area can be a drag, but while US real rate is now around zero, UK is still firmly negative, around -65bps in 10y (taking differences of the nominal swap rates and the breakeven inflation swap rates). Markets prices US inflation much higher than UK. Although both shows strong labor market (perhaps UK with a stronger momentum). Expect a correction. Especially if you believe in the Euro area turning corner.

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