Bond Refinancings in Europe Outweigh Deficit Cuts: Euro Credit
Record refinancing needs for Europe’s highest-deficit nations may overshadow spending cuts next year and increase the risk that more countries will follow Greece in requiring a rescue to avoid default.
Euro-region governments have to repay 582 billion euros ($803 billion) of debt in 2011, up from 521 billion euros this year, according to estimates from ING Groep NV. Spain has to roll over almost 20 percent of its outstanding loans, government figures show. Portugal has 23 billion euros of debt coming due and Ireland has more than 10 billion euros, according to data compiled by Bloomberg.
“I can’t ignore what’s going on in Ireland and Portugal, and the path of least resistance is for wider spreads or higher yields for both,” said Padhraic Garvey, head of developed market strategy at ING in Amsterdam. “I’m not predicting they will need a bailout next year. I’m just highlighting the risk.”
The extra yield investors demand for holding 10-year Irish bonds rather than German bunds rose last week to 454 basis points, the most since the introduction of the euro. It spread was at 418 basis points today. The yield premium for 10-year Greek bonds was 786 basis points more than Germany, the most of any euro nation. It was 183 basis points for Spain today and 386 basis points for Portugal.
“I’m not sure if yield spreads at these levels justify the risk,” said Christoph Kind, head of asset allocation at Frankfurt Trust, which oversees about $20 billion. “There is a significant amount of debt that’s needed to be refinanced, and we don’t know what the market situation will be like. You may argue that you get rewarded for taking that risk given the high yields. We prefer to be cautious.”
A 750 billion-euro backstop arranged by the European Union and the International Monetary Fund has failed to allay investor concern that some of the so-called euro-peripheral countries may buckle under the weight of their debt.
Spain had its top credit rating cut one level on Sept. 30 to Aa1 from Aaa by Moody’s Investors Service, which cited the nation’s “weak” economic outlook. The Irish government said the same day that costs to bail out the country’s banks may reach about 50 billion euros, equal to roughly 33 percent of the nation’s output.
Euro nations are struggling to implement spending cuts needed to trim deficits to the 3 percent limit demanded of the common currency members. Spanish workers went on a general strike last week for the first time in eight years to protest the austerity measures. In Greece, the main union for state workers, ADEDY, called for a nationwide strike on Oct. 7 because of the government’s proposals to reduce wages and pensions.
Portugal’s budget stalemate kept the costs of insuring against default of its debt close to record highs. Credit- default swaps on Portugal were at 398 basis points, making them the third-most expensive in Europe after Greece and Ireland, according to data provider CMA.
The opposition Social Democrats demand that Socialist Prime Minister Jose Socrates avoid additional tax increases next year, while Socrates’s party says it isn’t possible to reach deficit- reduction targets without raising revenue.
The Portuguese government is trying to reduce its budget gap after posting a deficit of 9.3 percent of gross domestic product in 2009, the highest in the 16-country euro region after Ireland, Greece and Spain. The government aims to narrow the shortfall to 7.3 percent this year, 4.6 percent next year, and intends to meet the EU limit of 3 percent in 2012.
In Dublin, the Economic & Social Research Institute forecast in July that Ireland will cut its “World War-type” budget deficit in half during 2011 from about 19.8 percent of GDP this year.
Waiting for Demand
“These are steps in the right direction, but until we get to the point where there is demand from real-money investors, it will be difficult for us to predict a significant contraction of spreads,” ING’s Garvey said.
Apart from Spanish and Italian bonds, debt issued by the euro periphery has declined this year. Greek bonds handed investors a 14 percent loss, Portuguese debt dropped 6.5 percent and Irish bonds fell 4.4 percent. That compares with the 9.1 percent gain of German bonds and 8.6 percent advance of French debt, according to indexes compiled by Bloomberg and the European Federation of Financial Analysts Societies.
Klaus Regling, chief executive officer of the newly established European Financial Stability Facility, said last week he doesn’t expect his group’s 440 billion-euro rescue fund to ever be tapped. The EFSF, set up in June by euro-region member countries to calm markets during Europe’s debt crisis, would sell debt backed by national guarantees to provide emergency loans to euro-region countries in financial distress.
“My central scenario of expectation is that we won’t have to make any loans available in the coming years,” Regling said during a Sept. 28 speech in Frankfurt. Terms for gaining access to the fund are “unattractive” as “the safety net isn’t supposed to be a safe haven, which is easy to reach,” he said.
Governments are “working on adjustment measures and further fiscal consolidation” to attain “positive results,” Regling said when asked about Portugal and Ireland.
“It’s too early to rule out” the possibility of a bailout, said Luca Cazzulani, a senior fixed-income strategist at UniCredit SpA in Milan. “The risk is there. If the banking- crisis in Ireland, for example, worsens and the government needs additional money to recapitalize banks, it might find itself in a difficult situation where investors stop lending them money.”
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