Negotiations over Greece still at a standstill. Yet, developments have been positive on other fronts of the crisis…..
For professional investors and advisers only
Negotiations with Greece over the PSI swap deal are still at a standstill. The terms of the swap would imply an NPV loss of 65-70% (due to waiver of 50% of capital, lengthening of maturities to 30 years, and a 3.5%-4% coupon). According to Juncker, it is essential that creditors waiver their request for an average coupon of 4%. In actual fact, it seems that negotiations are being hindered not only by the terms of the structuring of the new bonds, but also by political problems (potential involvement of the ECB) and legal ones (introduction of Collective Action Clauses). As regards the former issue, to date both the central bank and the German government have explicitly denied that institutional creditors will also accept to take part in any swaps; in particular, the exclusion of the share held by the ECB, estimated at EUR 40-45Bn, is an important aspect; major issues on this front are the implied seniority status that the bonds held in the ECB’s portfolio would acquire, if excluded from the PSI, over those held by the market, and the potential retroactive inclusion of CACs, that would make italmost impossible to exclude the ECB’s portfolio from the PSI. On the other hand, it is widely acknowledged that the size of the financing supplied by the second programme will have to be greater than initially estimated.
Apart from the Greek deadlock, however, developments have been positive on other fronts. Mrs. Lagarde said that the “firewall” must be large enough to “not have to be spent”, i.e. sufficient to act as a deterrent in the event of a crisis. From the Eurogroup meeting it emerged that details on the ESM will have to be defined on 20 February. The stabilisation mechanism will become operational by July, as already agreed at last December’s summit. The ministers of finance agreed that applications for support to the fund are subject to adoption of the new “fiscal compact”. It remains to be clarified whether Germany will allow the increase in the EFSF–ESM’s fire power to EUR 750Bn. Also in light of these developments, and beyond mounting tensions tied to Greek debt, the other peripheral markets performed well; the tightening of spreads on Italian bonds was especially significant, also vs. Spain and France.
Within this context, the European Council will attempt to reach a final agreement on the intergovernmental treaty known as “fiscal compact”. Any decision on the unfreezing of the second bailout package for Greece is subject to a positive outcome of negotiations on the PSI.
Important dates for the euro area debt crisis
30 January Italy: BTP auction
30 January European Council
14 February Italy: BTP auction (forecast: 6Bn; 25.8Bn reaching maturity)
20-21 February Eurogroup and Ecofin
24 February? G-20
29 February Greece: deadline for payment of the 8th tranche
01-02 March European Summit. Signing of the Intergovernmental Treaty and details on the ESM
12 March Eurogroup and Ecofin
14 March Italy: BTP auction (Intesa forecast: 8.5Bn – 14.8Bn reaching maturity)
20 March Greece: 14.5Bn in Greek bonds reaching maturity
29 March Italy: BTP auction (Intesa forecast: 9.2Bn)
30 March The Ministers of Finance of the European Union meet in Denmark
Source: EU, ECB, Bloomberg and Intesa Sanpaolo
(?) date to be confirmed
Note: Spain launches two medium-long term auctions on the first and third Thursdays of the month
The trend of Japan’s trade balance is currently being overlooked, but may have potentially risky implications. In December, the trade balance showed a new monthly deficit, and the balance in 2011 as a whole was markedly negative, at JPY -2.49 trillion. The substantial trade deficit is largely due to energy: since the earthquake, fuel imports have soared to face the plunge in power sector production capacity. This is a structural factor, that could keep the country’s trade balance negative for years to come. The deficit is further aggravated by the appreciation of the yen and by the production delocalisation in the manufacturing sector. To date, for the past thirty years or so, Japan has enjoyed a balance of payment surplus, thanks to both trade flows and investment income: Japan’s net creditor position has so far contributed to contain risks tied to the public debt, which has by now reached 220% of GDP. In the future, maintaining a balance of payment surplus will depend on the size of net investment income. For now, there are no signs of a reversal of the positive trend on this front: both portfolio flows (around 70% of capital income) and direct investments (27% of the total) are structurally positive. However, the country’s status as net foreign lender is now placed at risk by two factors. The persistent appreciation of the yen could impact the trend of net capital income; secondly, the ageing population may lead to a domestic savings gap in the not-too-distant future. Without the trade surplus buffer, risks to the financing of public debt increase considerably.
The financial analysts who prepared this report, and whose names and roles appear on the first page, certify that: (1) The views expressed on companies mentioned herein accurately reflect independent, fair and balanced personal views; (2) No direct or indirect compensation has been or will be received in exchange for any views expressed. Specific disclosures: The analysts who prepared this report do not receive bonuses, salaries, or any other form of compensation that is based upon specific investment banking transactions.
This research has been prepared by Intesa Sanpaolo S.p.A. and distributed by Banca IMI S.p.A. Milan, Banca IMI SpA-London Branch (a member of the London Stock Exchange) and Banca IMI Securities Corp (a member of the NYSE and NASD). Intesa Sanpaolo S.p.A. accepts full responsibility for the contents of this report. Please also note that Intesa Sanpaolo S.p.A. reserves the right to issue this document to its own clients. Banca IMI S.p.A. and Intesa Sanpaolo S.p.A. are both part of the Gruppo Intesa Sanpaolo. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. are both authorised by the Banca d’Italia, are both regulated by the Financial Services Authority in the conduct of designated investment business in the UK and by the SEC for the conduct of US business.
Opinions and estimates in this research are as at the date of this material and are subject to change without notice to the recipient. Information and opinions have been obtained from sources believed to be reliable, but no representation or warranty is made as to their accuracy or correctness. Past performance is not a guarantee of future results. The investments and strategies discussed in this research may not be suitable for all investors. If you are in any doubt you should consult your investment advisor.
This report has been prepared solely for information purposes and is not intended as an offer or solicitation with respect to the purchase or sale of any financial products. It should not be regarded as a substitute for the exercise of the recipient’s own judgement.
No Intesa Sanpaolo S.p.A. or Banca IMI S.p.A. entities accept any liability whatsoever for any direct, consequential or indirect loss arising from any use of material contained in this report.
This document may only be reproduced or published together with the name of Intesa Sanpaolo S.p.A. and Banca IMI S.p.A.. Intesa Sanpaolo S.p.A. and Banca IMI S.p.A. have in place a Joint Conflicts Management Policy for managing effectively the conflicts of interest which might affect the impartiality of all investment research which is held out, or where it is reasonable for the user to rely on the research, as being an impartial assessment of the value or prospects of its subject matter. A copy of this Policy is available to the recipient of this research upon making a written request to the Compliance Officer, Intesa Sanpaolo S.p.A., 90 Queen Street, London EC4N 1SA.
Intesa Sanpaolo S.p.A. has formalised a set of principles and procedures for dealing with conflicts of interest (“Research Policy”). The Research Policy is clearly explained in the relevant section of Banca IMI’s web site (www.bancaimi.com).
Member companies of the Intesa Sanpaolo Group, or their directors and/or representatives and/or employees and/or members of their households, may have a long or short position in any securities mentioned at any time, and may make a purchase and/or sale, or offer to make a purchase and/or sale, of any of the securities from time to time in the open market or otherwise. Intesa Sanpaolo S.p.A. issues and circulates research to Qualified Institutional Investors in the USA only through Banca IMI Securities Corp., 245 Park Avenue, 35th floor, 10167 New York, NY,USA, Tel: (1) 212 326 1230. Residents in Italy: This document is intended for distribution only to professional investors as defined in art.31, Consob Regulation no. 11522 of 1.07.1998 either as a printed document and/or in electronic form. Person and residents in the UK: This document is not for distribution in the United Kingdom to persons who would be defined as private customers under rules of the FSA.
US persons: This document is intended for distribution in the United States only to Qualified Institutional Investors as defined in Rule 144a of the Securities Act of 1933. US Customers wishing to effect a transaction should do so only by contacting a representative at Banca IMI Securities Corp. in the US (see contact details above).
Trading Ideas are based on the market’s expectations, investors’ positioning and technical, quantitative or qualitative aspects. They take into account the key macro and market events and to what extent they have already been discounted in yields and/or market spreads. They are also based on events which are expected to affect the market trend in terms of yields and/or spreads in the short-medium term. The Trading Ideas may refer to both cash and derivative instruments and indicate a precise target or yield range or a yield spread between different market curves or different maturities on the same curve. The relative valuations may be in terms of yield, asset swap spreads or benchmark spreads.
Coverage Policy And Frequency Of Research Reports
Intesa Sanpaolo S.p.A. trading ideas are made in both a very short time horizon (the current day or subsequent days) or in a horizon ranging from one week to three months, in conjunction with any exceptional event that affects the issuer’s operations. In the case of a short note, we advise investors to refer to the most recent report published by Intesa Sanpaolo S.p.A’s Research Department for a full analysis of valuation methodology, earnings assumptions and risks. Research is available on IMI’s web site (www.bancaimi.com) or by contacting your sales representative.
Source: BONDWorld – Intesa Sanpaolo – Research Department