Beruflich Dokumente
Kultur Dokumente
April 2010
Tom Joyce
Debt Capital Markets Strategist
(212)-250-8754
Tom.joyce@db.com
Deutsche Bank Securities Inc., a subsidiary of Deutsche Bank AG, conducts investment banking and
securities activities in the United States.
A Broader Phenomenon of Sovereign Risk
“Every once in a while, the world is faced with a major economic development that
is ill-understood at first and dismissed as of limited relevance, and which then
catches governments, companies and households unawares.”
“In the near term, the main risk is that, if unchecked, market concerns about
sovereign liquidity and solvency in Greece could turn into a full blown and
contagious sovereign debt crisis”
~ IMF, World Economic Outlook (April 2010)
“I hope that I am wrong but I fear that by end of the year, they will find out that
Greece needs a lot more money in 2011 and 2012, and that we will have
serious problems getting another package through.”
- Thomas Mayer, Deutsche Bank Chief Economist (April 2010)
2
Contents
Section
3 Focus on Greece:
A. The Problem
B. Potential Solutions
3
Why the Greece Sovereign Credit Crisis
Accelerated Sharply After March 25th?
Section 1
Why the Greek Crisis Accelerated After March 25th?
The Acceleration of the Greek Credit Crisis after March 25th, 2010
April 20 IMF Releases Global Financial Stability Report with Sovereign Warnings
5
March 25: Joint EU / IMF Package with Few Details
On March 25th, the Overview of March 25th Joint EU / IMF Package
European Council
met in Brussels for
their quarterly Announced Details The Missing Details?
summit meeting
and agreed on a Joint EU / IMF package of loans Exact size of the package
rescue package of IMF involvement is “substantial”
“last resort” that Euro countries “expected” to pay based Exact cost
would involve both
on their capital weights
the IMF and the EU
Duration of the loans
By involving the IMF Tough conditionality
in the solution “Last resort” only (not a freely available Duration of the package
already, the EU backstop facility)
essentially cut off IMF not part of decision for its use Exact role of IMF
Greece’s other key Requires unanimous 27 nation support
option, and Distribution of funds?
Germany, in Not cheap Technical assistance?
particular, “Risk adequate pricing” that will Enforcement power / set conditions?
increased its encourage Greece to return to market for
leverage over the
financing
process
*** Over subsequent weeks, Investors reacted
Required review of EU budget rules very negatively to the lack of detail ***
Proposals due by year-end
Tougher budget rules
More flexibility for crisis response
The sharp acceleration of the Greek credit crisis began on March 25th, when the EU and IMF
announced a “joint-rescue package” with very few details; uncertainty and volatility followed
Source: Mark Wall, DB Chief European Economist. Deutsche Bank Markets Research. 6
March 30: Low Demand For Bond Re-opening
March 29: EUR 5 Billion New Issue March 30: EUR 390 Billion Re-Opening
New Issue: 7 Year bond raising EUR 5 billion Re-opening: EUR 390 million re-opening of 20
at mid swaps + 310 bps, or ~ 6% YTM year 2022 bond on March 30, 2010
Demand: Over EUR 6.25 billion from 175 + Demand: Greece had initially hoped to re-open
accounts (10 year bond earlier in year had this 20 year bond for EUR 1 billion, but demand
EUR 16 billion demand from 400 + accounts) was not sufficient
After-market performance: Immediately *** The poor performance of Greece’s Mar 29th 7 year bond,
sold-off in after-markets; negatively impacted and low demand for its March 30th 20 year re-opening,
demand for March 30 re-opening signaled limited Greek access to public debt markets
After-market Performance of Greece’s March 29th 7 Year EUR 5 Billion Bond Deal
9.5
7.5
6.5
6
30‐Mar 3‐Apr 7‐Apr 11‐Apr 15‐Apr 19‐Apr 23‐Apr
GGB 5.9% '17s
Source: Deutsche Bank, Bloomberg (GGB, Corp).
77
April 7: Top 4 Greek Banks Turn to Government
14
13 26
During the prior week, Moody’s
12
downgraded the debt ratings of 11 22
Greece’s 5 largest banks, 10
highlighting the pressure on their 9
18
8
loan portfolios from the
7
recession 6 14
5
4 10
An escalation of the Greek crisis 1‐Sep 30‐Sep 29‐Oct 27‐Nov 26‐Dec 24‐Jan 22‐Feb 23‐Mar 21‐Apr 1‐Sep 30‐Sep 29‐Oct 27‐Nov26‐Dec 24‐Jan 22‐Feb23‐Mar21‐Apr
could lead to deposit outflows, EFG Eurobank
National Bank of Greece
thereby increasing the potential
of “contagion”
On April 9th, Fitch Downgrade: Greece’s Long Term foreign and local currency Issuer Default Ratings downgraded
Ratings to BBB- from BBB+, Outlook Negative
downgraded
Greece from BBB+
to BBB-, Outlook Drivers of the Downgrade:
Negative Fiscal challenge increases
More adverse prospects for economic growth
Increased interest costs
Ongoing uncertainties on the Government’s financing strategy amidst market volatility
“The sharp rise in interest rates faced by the government this year, in
combination with a deterioration in the outlook for economic growth, will
make it harder for the government to achieve its fiscal targets of reducing the
deficit to 8.7% of GDP this year and ensuring that public debt peaks at just
over 120% of GDP in 2010 and 2011.”
- Fitch Ratings (April 9, 2010)
Critical Question: Would markets be sufficiently satisfied with this detail, or would continued
uncertainty around IMF details and nation-state approvals create continued uncertainty?
11
April 20: IMF Warning on Sovereign Credit Risk
On April 20th, the IMF
released its
updated Global
Financial Stability
Report …
…and sovereign
credit risks among
advanced
countries were “Risks to global financial stability have eased as the economic
emphasized as a
primary source of recovery has gained steam, but concerns about advanced
renewed risk in the
global financial country sovereign risks could undermine stability gains and
markets
prolong the collapse of credit.”
12
April 22: Greece 2009 Fiscal Deficit Increased
Greece’s debt crisis Greece’s 2009 Fiscal Deficit Forecast
reached a dramatic
crescendo on April
On April 22, 2010, Greece’s 2009 budget deficit was revised higher for the 4th time,
22nd as Eurostat
to 13.6% (or US$44.3 billion), up from a prior estimate of 12.9%
upwardly revised
Greece’s 2009 Eurostat indicated that Greece’s debt is 115% of the size of the economy (EUR
fiscal deficit to 273.4 billion, or US $395 billion)
13.6%, the 4th such
revision in the last
year Eurostat indicated that uncertainties around Greek economic data could cause a 5th
revision, up to 14.1%
Markets reacted very
dramatically on the Greece’s 2009 Budget Deficit Revisions
news
April 2009 Forecast October 2009 Revision January 2010 Revision April, 22, 2010
0
‐2
‐4
‐6
Percent (%)
‐8
‐10
‐12
‐14
‐16 Greece revised its 2009 budget deficit 4 times, most recently to 13.6%
On April 22nd, Downgrade: Greece’s government bond rating downgraded from A2 to A3 and placed on review
Moody’s for further possible downgrade
downgraded
A3 is just 4 notches above “junk” (non-investment grade) on Moody’s ratings spectrum
Greece from A2 to
A3 and placed
them on review for Drivers of the Downgrade:
further possible
downgrade Debt will only stabilize at a more costly level than previously anticipated
Uncertainty about credible debt stabilization
Headwinds of higher interest rates and lower economic growth
EU’s fractious mobilization of emergency aid
“It is unlikely that the rating will remain at A3, unless the government’s
actions can restore confidence in the markets and counteract the prevailing
headwinds of higher interest rates and low growth that could ultimately
undermine the government’s ability to sustainably cut debt levels.”
- Moody’s Investor Service (April 22, 2010)
14
April 22: 2 & 10 Year Bond Yields Breach 11 & 9%
Greek bond yields April 22: Sharp Decline in Greek Bond Prices
posted a dramatic April 22: Greek 10 year bonds traded as high as 9.20%, or 6.1% above 10 Year German bonds
decline on April
22nd to Driven by Eurostat fiscal deficit revision and Moody’s downgrade earlier in the day
unsustainable Yield on the Greece 2 year note soared by more than 275 bps, and actually breached 11%
levels that are
effectively priced
Greek 10 Year and 2 Year Bond Yields
for a “catastrophic
event” (of default 11.00
or restructuring) April 22nd Greece 10 Year Bond Yield: 9.20%
10.00 April 22nd Greece 2 Year Bond Yield: 10.23%
9.00
8.00
7.00
Yield (%)
6.00
5.00
4.00
3.00
2.00
1‐Jan 8‐Jan 15‐Jan 22‐Jan 29‐Jan 5‐Feb 12‐Feb 19‐Feb 26‐Feb 5‐Mar 12‐Mar 19‐Mar 26‐Mar 2‐Apr 9‐Apr 16‐Apr 23‐Apr
April 22nd Greece 5 Year CDS: 638 bps April 22nd Greece 2 Year CDS: 858 bps
600 875
550 775
500 675
450 575
bps
bps
400 475
350 375
300 275
250 175
1‐Jan 23‐Jan 14‐Feb 8‐Mar 30‐Mar 21‐Apr 1‐Jan 23‐Jan 14‐Feb 8‐Mar 30‐Mar 21‐Apr
Greece 5yr cds Greece 2y CDS
Source: Deutsche Bank, Bloomberg 16
16
April 22: Euro/ USD Trades Down to 1.32
On April 22nd, the
Euro traded down Euro Reaches 11 month low
to an 11 month low March 23, 2010: With no formal aid package for Greece yet announced, the Euro dips below
against the USD, 1.35 for first time since May 2009 (10 month low)
dipping below 1.33
for the first time
April 22, 2010: Euro slide continues, reaching an 11 month low against the USD of 1.32 on
since May 1, 2009
continued negative news earlier that day
EU downwardly revised 2009 Greece budget deficit to 13.6%
Moody’s downgrades Greece to A3 (4 notches from “junk” status)
Greece CDS and bond yields widen to record levels
1.50
1.45
Euro / US$
1.40
1.35
1.30
May-09 Jun-09 Jul-09 Aug-09 Sep-09 Oct-09 Nov-09 Dec-09 Jan-10 Feb-10 Mar-10 Apr-10
“We believe our European partners will act decisively and provide Greece with a safe
haven to rebuild our ship of state with strong and reliable materials.”
-Greek Prime Minister, George Papandreou, announces the decision
*The UK financial sector was adjusted to reflect its position as a financial hub. *Data for Switzerland represent year-end 2007
20
Source: Haver Analytics, FDIC, SNL Financial, Federal Reserve. McKinsey Global Institute. IMF Global Financial Stability Report.
Sovereign Market Vulnerability Indicators
There are several key Review of Selected Sovereign Vulnerability Indicators
indicators, beyond
the absolute
Depository Bank Claims
amount of Gov't Debt Held Abroad on Government (1)
sovereign debt,
that are critical to Country (% of GDP) (% of GDP)
understanding the
vulnerability of
sovereign leverage Greece 99.0% 17.5%
to an economy
Portugal 60.2% 10.2%
Italy 56.4% 29.4%
Ireland 47.2% 5.8%
Spain 26.9% 20.6%
United States 24.7% 8.2%
United Kingdom 17.9% 5.1%
Japan 13.7% 69.3%
(i) Source: IMF Global Financial Stability Report (April 2010). Includes all claims of depository institutions, excluding the Central Bank, on the
Government. 21
The 4 Stages of the Sovereign Credit Crisis
4 Stages of the Sovereign Credit Crisis
The sovereign credit
crisis evolved
Phase 1: As risk increased, core sovereign spreads (France, Germany) benefited from an initial flight
through several
to quality among investors
stages during the
2007 – 2010 global Phase 2: Post Lehman, sovereigns with financial systems directly weakened by the crisis gapped
financial crisis wider (Austria, Ireland, Italy and the Netherlands)
Phase 3: As sovereign utilized public balance sheets to support the banks, systemic risk subsided
Phase 4: As private sector leverage shifted to the public sector, and economic weakness contributed
to fiscal strains, sovereign credit risk accelerated (Greece, Portugal, Spain, Ireland and Italy)
250
200
bps
150
100
50
0
‐50
‐100
Jul‐07 Jan‐08 Jul‐08 Jan‐09 Jul‐09 Jan‐10
Source: Deutsche Bank Global Markets Research. Carmen Reinhart and Kenneth Rogoff: “This Time is Different.” McKinsey Global Institute: “Debt
and Deleveraging: The Global Credit Bubble and its Economic Consequences.” 23
Focus on Greece
Section 3
The Problem
Section A
Summary of Greece’s Problem
Greece has the most Assessing the Greece Problem
acute and complex
sovereign debt Country % of Euro - 16 % of Euro - 27
problem in the
Greece’s 3 Part Problem
Germany 26.7 20.3
European Union France 21.3 16.1
Italy 17.0 12.9
Although Greece is #1: Credibility Problem Spain 11.8 8.9
small on a relative
Netherlands 6.4 4.8
basis…
Belgium 3.7 2.8
Austria 3.0 2.3
… the fragility of the #2: Liquidity Problem Greece 2.7 2.0
global financial
Finland 1.9 1.5
system remains
Ireland 1.9 1.4
VERY high…
Portugal 1.8 1.4
… and therefore the #3: Insolvency Problem Slovakia 0.7 0.5
contagion risk of Luxembourg 0.3 0.2
sovereign credit Slovenia 0.3 0.2
issues among Cyprus 0.1 0.1
smaller states is Source: Mark Wall, DB Chief European Economist Malta 0.0 0.0
significant UK n.a. 13.5
Poland n.a. 2.6
Sweden n.a. 2.4
Denmark n.a. 1.9
Czech Republic n.a. 1.2
Romania n.a. 1.0
Hungary n.a. 0.8
Bulgaria n.a. 0.3
Lithuania n.a. 0.2
Latvia n.a. 0.2
Estonia n.a. 0.1
Source: Deutsche Bank Markets Research. Mark Wall, DB Chief European Economist. 26
Problem #1: Credibility Problem
Greece is highly Sources of Greece’s Credibility Problem
dependent on the
capital markets to
Inconsistent budget forecasts and revisions
solve its liquidity 2009 Fiscal Deficit Revisions
problem… Tax system
Fiscal irregularities
…and to this end, On April 22, 2010, Greece’s 2009
Greece has a Overstatement of social security surpluses budget deficit was revised higher for
significant Incorrect reporting of military expenditures the 4th time, to 13.6%, up from a prior
credibility problem estimate of 12.9%
Incorrect reporting of healthcare expenditures
that has been Eurostat indicated that uncertainties
building for many Treatment of certain EU subsidies as revenue around Greek economic data could
years Accounting irregularities cause a 5th revision, up to 14.1%
Derivatives transactions (to mask debt levels)
-2.0%
The deficit limit to be
allowed into the -4.0%
Euro-zone (red
line) is 3% -6.0%
-8.0%
-10.0% Original Revised Greece revised its 2003 budget deficit 5 times
-12.0%
Greece revised its 2009 budget deficit 4 times
-14.0%
2010 liquidity needs Total Debt Outstanding: Greece has nearly US$ 400 billion of total outstanding debt
for European
sovereigns are Near-term Maturities: Greece has US$ 73 billion of maturities in 2010 alone (~US$27 bn of which
sharply higher is due in April and May)
than in prior
years…
Cost of Financing: As of April 22nd, Greek sovereign debt costs had reached unsustainably high
…with Greece facing levels ( > 9% on 10 year)
significant
maturities (in Next Critical Maturity: EUR 8.5 billion 10 Year Bond on May 19, 2010
excess of US$20
billion) in April and
2010 Liquidity Needs
May of this year Total Debt Outstanding (US$)
(Bond Maturities + ST Debt Roll + Fiscal Deficit)
500
(US$ billions) 1,600 (US$ billions)
$445 $1,391
450 1,400
400
1,200
350
300 $279 1,000
USD bn
USD bn
250 800
$589
200 600
150 $395
400
100 $73
$49 $50 $144 $129
50 200
0 0
Portugal Italy Ireland Greece Spain Portugal Italy Ireland Greece Spain
Critics of the current Greek Government would say that they inherited a significant fiscal
deficit crisis, and in the course of several months, created an unparalleled liquidity crisis.
Source: Fitch, Wall Street Research. US$ values based on 1.36 Euro exchange rate
28
Problem #3: Insolvency Problem
Twin deficits are a Assessing Euro Sovereign Risk Through the Lens of Twin Deficits
key determinant
for analyzing An IMF regression analysis of 24 countries indicates that (i) current account deficits, and (ii)
sovereign credit fiscal deficits, are highly correlated with higher sovereign CDS spreads
risk Greece’s Fiscal Deficit: At 13.6% of 2009 GDP, it is among the largest in the European
Union, and well above the 3% limits set by the EU’s Maastricht Treaty in 1992
Greece has one of the
highest fiscal
deficits in the EU Greece’s Current Account Deficit: Peaked in Q3 2008; should be down sharply in 2010 –
2011 with aid packages (but still projected to be negative in 2010)
8 0
6
3% limit set -2
4 by EU
Maastricht -4
2 Treaty
% of GDP
% of GDP
0 -6
-2 -8
-4
-10
-6
-8 -12
Be ds
Ire l
Gr d
ce
ia
rea
th e n
Po e
y
um
ly
ga
Eu K
lan
Be s
Ire l
Ne a i
lan
c
an
Gr d
ce
ia
st r
rea
I ta
th e n
y
Po e
um
ly
ga
U
UK
an
nd
ee
lan
rtu
Ne a i
lan
an
Sp
lg i
-A
r la
st r
It a
an
rm
Au
Fin
ee
rtu
Sp
lg i
-A
Fr
r la
ro
rm
Au
Fin
Fr
Ge
ro
Ge
Eu
29
Source: Deutsche Bank Global Markets Research. IMF Global Financial Stability Report (April 2010).
Potential Solutions
Section B
Critical Step #1: Address Liquidity Problem
Joint EU / IMF Solution (for 2010) Other Options Considered
Greece has US$27
billion of maturities Key Dates: Raise debt in capital markets (too little
in April/ May, and demand for Greek debt; pricing too high)
US$73 billion of
maturities in 2010, March 25: Formal announcement of
triggered an EU/ IMF commitment (no details) EU Debt guarantees (violation of EU
immediate and treaties; difficult precedent)
April 11: Details on size, cost and
short-term liquidity
crisis tenor provided
April 23: Greece formally activates EU Bond issuance (reconciliation with EU
However, the EU / IMF request for the money treaties challenging)
rescue package
would solve the
liquidity crisis for Details: Bilateral arrangements (moral hazard
2010 only issues; little German domestic support)
Size: ~ EUR 40 - 45 billion (EUR 30
billion from Euro nations and EUR 10-
15 billion from IMF) Infrastructure advances: not sufficient
size
Cost: Approximately 5% (Equal to
Euribor + 300bps + 100 bps step-up in
IMF’s Greece Focus year 3 + 50 bps service charge) Key Question
Healthcare reform How to address the potential liquidity crisis
Pension reform
Duration: 3 years
that may arise with Greece’s significant
Labor market 2011 and 2012 maturity obligations?
reform
“If I owe you a pound, I have a problem, but if I owe you a million, the problem is yours.”
~ John Maynard Keynes (English Economist, 1883 – 1946)
31
Critical Step #2: Address Long-Term Solvency
Greece’s Fiscal Plan: EUR 4.8 billion (USD 6.5 billion, or 2% of GDP)
On March 3rd,
Greece
announced a more #1: Revenue Raising Initiatives #2: Expenditure Reductions
detailed plan for
achieving its 3 year (EUR 2.4 billion / USD 3.25 billion) (EUR 2.4 billion / US 3.25 billion)
fiscal and growth
Increase value added tax from 19% to Reduce public sector wages and
targets
21% pensions (EUR 1.7 billion)
Key Question: How will Greece mitigate the vicious circle of fiscal cuts and economic
slowdown as it strives to meet its 3 Year Stability and Growth Program targets?
32
Critical Step #3: Greek Debt Restructuring?
Will a Greek Debt Restructuring Be Needed at Some Point?
Although Greece has
firmly stated that a Greek Government Position: Debt restructuring is “off the table”
Greek debt
restructuring is
“off the table,” Capital Markets Position: Following the declines of April 22 in particular, the market seems to
investor sentiment be increasingly pricing in a greater risk of some sort of partial, or delayed, Greek bond repayments
appears to believe
that a reduction or
delay in Greek Market Precedents:
bond interest Most precedents to date are largely emerging market; Greek membership in the EU
payments is makes the application of such historical emerging market precedents complicated
inevitable…
Aggressive Precedent: Argentina, 2002 (75% haircuts on outstanding debt)
…some even calling it Moderate Precedent: Poland, early 1990s (approximately 50% haircuts)
an “overwhelming
probability”
Impact of IMF / EU Aid on Existing Creditors: The IMF always takes a senior position in the
capital structure (EU likely to as well), and so the IMF / EU aid of EUR45 billion will adversely
impact the subordination, and recovery values, of existing Greek bonds
“We wouldn’t touch Greece at the moment. The market needs some clarity on whether or not
there will be some kind of restructuring of Greek bonds. There’s too much uncertainty and
volatility.”
- Head of Fixed Income at UK Asset Manager & FTSE 100 Company (April, 2010) 33
Source: Deutsche Bank Global Markets Research. Gillian Edgeworth and Thomas Mayer.
Critical Step #4: Meet 3 Year Fiscal & Growth Targets
Greece’s 3 Year “Growth and Stability Program” Forecasts
In 2010, Greece
needed to tap the Fiscal Deficit Forecast Debt / GDP Forecast
assistance offered
by the EU and IMF (% of GDP) 3 Year Plan to reduce fiscal Debt / GDP will peak in 2011
12.7% 120.6%
deficit below 3%, in accordance 120.4%
To avoid a similar with EU guidelines 117.7%
“rescue” in 2011-
8.7%
2012, Greece will 113.4% 113.4%
have to deliver on
its official 3 Year 5.6%
“Stability and
Growth Program” 2.8%
targets 2.0%
2009 2010E 2011E 2012E 2013E 2009 2010E 2011E 2012E 2013E
9.0%
-0.3%
Prime
Minister: Chancellor: Angela European Central Bank President: Jean- Managing Director
George Papandreou Merkel Claude Trichet (President): Dominique
Strauss-Kahn
Finance Minister: FinanceMinister: European Union President: Herman Van
George Wolfgang Schaeuble Rompuy First
Deputy
Papaconstantinou Managing Director
(Rotating)President of EU: Spain (Prime (IMF # 2): John Lipsky
OppositionLeader: Minister Jose Luis Rodriguez Zapatero)
Antonis Samaras European Commission President: Jose
Currently endorsing Manuel Barroso (former Prime Minister of
Government plan Portugal)
36
The “Contagion Effect” for the Peripherals
Section 4
The “Ring of Fire”
A “ring of fire” The “Contagion Effect” on the Peripherals
contagion effect is
The debt burdens of several European “peripheral” sovereigns are being closely watched by
spreading around
a multitude of investors
sovereign credits Italy, Portugal, Ireland and Spain (in particular)
with debt burdens
Countries within the “ring of fire” will be particularly vulnerable
comparably high to
Greece
In its April 2010 Global Financial Stability Report, the IMF said that Portugal, and to a lesser
extent Spain and Italy, would be the most likely to suffer from a Greece “contagion effect”
-5%
120 Netherlands Italy
-6% Belgium
Germany
100 -7% Portugal
2010 Budget Deficit
France
-8%
80
% of GDP
-9%
60 “Ring of Fire”
-10% Spain Greece
40 -11%
Ireland
-12%
20 UK
-13%
0
-14%
70% 80% 90% 100% 110% 120% 130%
Be s
l
Gr d
ce
ia
d
rea
Ne a in
y
Po e
um
ly
ga
nd
lan
lan
an
c
str
Ita
an
ee
rtu
Sp
lg i
-A
r la
Au
Fin
Ire
Fr
ro
th e
Ge
Eu
Source: Deutsche Bank forecasts. The “Ring of Fire,” as quoted by Bill Gross, PIMCO.
38
The “Contagion Effect” for the Peripherals
Euro Sovereign 10 Yr Credit Spreads “Peripherals” 10 Yr Bond Spread over Germany
Although Greece is
the clear outlier 600
6.0
on both credit Record spikes in Greek bond
500 yields on April 22nd had a spill-
and CDS spread 5.0
over effect on the peripherals
levels, several
other countries 400 4.0
have come into
Bps
%
close focus 300 3.0
2.0
The deterioration of 200
the Greece 1.0
situation has 100
directly impacted 0.0
these levels in 0 Oct-07 Mar-08 Aug-08 Jan-09 Jun-09 Nov-09
recent weeks as NL FI FR AT BE SP IT IE PT GR
well Greece Ireland Portugal Spain
10Y spreads to Germany
350
Egypt Lebanon
Portugal Vietnam
250 Bulgaria
Kazakhstan
Hungary
Uruguay
Turkey,
Philippines
150 Spain Italy
Ireland SOAF Russia Colombia
Poland
Israel MX Brazil,
Chile Peru
Thailand
Belgium China S. Korea Malaysia
50 Austria
UK
USA, FR
GE
Ratings (avg. of Moody's/S&P)
-50
Aaa Aa2 A1 A3 Baa2 Ba1 Ba3 B2
Portugal
Ireland
Greece
Negative outlook in
Aaa (Stable) n/a AA+ (Neg) AAA (Stable) n/a
Dec '09
Spain
Downgrades in recent weeks have demonstrated how ratings can become a loose
cannon as the Sovereign Crisis unfolds, and can lead to a spiraling of both
sovereign and, by market reaction, bank spreads throughout the region
Source: Bloomberg 41
Potential Implications for Credit Markets
Section 5
Potential Implications
43
Key Areas of Concern
The expected ebb and Key Areas of Concern
flow of the
sovereign debt
crisis throughout
2010 will impact a
Potential debt restructuring
full range of
markets globally
Banking system
The most immediate
and direct threat to
financial market
stability is Greece, Market volatility
but a “contagion
effect” could have
more far reaching
implications
Credit markets
Currency markets
Economic growth
Source: Deutsche Bank Markets Research. Mark Wall, DB Chief European Economist. 44
Potential Greek Debt Restructuring?
Potential Implication of a Greece Debt Restructuring?
Although Greece has
firmly stated that a Market Position: Following the sharp declines of April 22nd, the market seems to be increasingly pricing in
Greek debt
restructuring is the likelihood of either partial reductions, or delays, in Greek debt repayments
“off the table,”
Key Question: If Greece was to “trip” in its fiscal consolidation program, and a restructuring of Greek debt
investor sentiment
appears to believe followed, would such a default unfold more aggressively (with the 75% haircuts of Argentina’s precedent), or
that a reduction or
delay in Greek in a highly managed and orderly fashion (with modest to medium haircuts of < 50%)?
bond interest
payments is Argentina Precedent, 2002 Poland Precedent, early 1990s
inevitable… (Less controlled; 75% Haircuts) (More Managed; ~ 50% Haircuts)
…some even calling it Greek debt / GDP would decline to ~ 30% Greek Debt / GDP would decline to ~ 60%
an “overwhelming Would be a “devastating” event for the Would be a “significant” event for the
probability” European financial system European financial system
Defaults of many creditor institutions If managed in “orderly” fashion, most
Massive investor losses and cross-
creditors would avoid default themselves
exposures However, losses would be significant
Would likely trigger a European financial and Could trigger a European financial crisis, but
banking crisis (and possibly global) should be more contained
Analogous to a “Lehman-type” event with full Range of “unintended consequences” likely
range of unintended consequences but likely manageable
Confidence in European “peripherals” would Significant contagion and spill-over effects
evaporate immediately (significant contagion to European peripherals likely
effects to Portugal, Spain, Ireland, Italy and Significant downward pressure on European
others) growth
Significant questions for Euro longer term Significant questions for Euro longer term
Overseas Demand: potentially much higher as US$ assets become more attractive;
Overseas
global capital flows toward US$
Demand
For example, we have seen overseas demand on several recent non-financial
corporate bond financings in excess of 20% of total issuance size (for BBB
type names), which historically may have been closer to 5-10% area
Differentiation and Focus on Country of Origin: more pressure on bank, utility and
Issuer Origin
Focus telecom spreads from Europe that have frequently tapped US$ markets in the past
Source: Bloomberg
46
Massive Exposure for European Banks
European Banks may Sources of European Bank Exposures
represent the most
significant channel Asset Side Liabilities Side
for “contagion”
from the sovereign Losses on government bond portfolios Higher bank funding costs, and less financing
credit crisis Losses on loan portfolios (cross-border, local)
market access (less demand, more volatility)
Erosion in perceived value of Government
Counterparty exposures on derivatives
guarantees
Generally, bank business models highly
Ratings downgrades can drive higher haircuts
susceptible to economic slowdowns and market
instability on government securities used for central bank
or commercial repo
USD bn
50 500
40 400
30 300
$18 $178
20 200
$9
10 100
0 0
Ireland Spain Greece Portugal Aggregate exposure to Top 10 US bank
Greece, Ireland, Portugal, Tier 1 capital
Ireland Spain Greece Portugal and Spain
Euro / US$ Spot (1999 - Present) Euro / US$ Spot (May, 2009 – Present )
1.7
DB 2010 EUR/ USD 1.55
Forecast: 1.35 1.6
1.5 1.50
1.4
1.3 1.45
Euro / US$
Euro / US$
1.2
1.40
1.1
1.0 1.35
0.9
0.8 1.30
0.7
1.25
Source: Bloomberg
0
9
09
10
09
09
9
9
9
-09
l -0
b-1
c-0
t- 0
v-0
g-
p-
n-
n-
y
Ju
Oc
Fe
Au
Se
De
Ju
Ja
No
Ma
49
Implications for Commodities
A stronger USD Implications for Commodities of the Sovereign Credit Crisis
reinforces
downward Impact of Stronger USD: extent of USD rally will be linked to depth of crisis and is likely to reinforce downward
pressure on nearly pressure on nearly all commodity asset classes, especially oil
all commodities,
especially oil… Impact of Economic Weakness: will depend on depth of crisis and potential contagion effects; weaker industrial
capacity will negatively impact commodity pricing
…Gold may be the
Impact may be exacerbated by an already vulnerable financial system and global economic recovery outlook
exception to the
extent volatility In addition, could reinforce 2009 downward pressure on refining margins, negatively impacting profitability,
spikes sharply if and potentially increasing prospect of sales and/ or shutdowns
the sovereign
crisis escalates
Flight to Quality (Risk-aversion): to the extent the crisis spikes sharply, Gold prices would be the exception to
the generally downward pressure on commodity prices
1,150 90
DB 2010 Oil (bbl)
Forecast: $70 1,100 80
1,050 70
$ per troy oz
$ per bbl
1,000 60
950 50
900 40
850 30
800 20
Source: Bloomberg Feb-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10 Feb-09 Apr-09 Jul-09 Oct-09 Jan-10 Apr-10
50
Summary of Potential Implications
Directional
Markets / Entities Impact Potential Implications (Depending on Crisis Depth)
US$ Bond Market New Strategic: Pre-funding more important than ever (volatility creates shorter issuance windows)
Issue Conditions Spreads: Upward pressure on new issue, risk and liquidity premiums
Treasury yields: Creates downward pressure on rates if volatility and global systemic risk rises
U.S. Economy Increases risk of double-dip; lower overseas earnings; lower U.S. exports on stronger USD; high
debt levels creates higher inflation over time; contagion effects; higher costs of capital
European Economy Significant potential drag on recovery: Large exposures for banking system; systemic risk and
contagion; reduced lending; austerity measures to reduce debt; social unrest; coordinating policy;
higher taxes; lower corporate earnings; sharply higher cost of capital; repo eligibility with ECB
U.S. Banks Limited direct lending and/or derivative losses (especially vis-à-vis capital)
More indirect impact: bank spreads very vulnerable to exogenous shocks at this time; contagion
effect; higher cost of capital; increases focus on financial regulatory reform
European Banks Very significant direct bank exposures: In excess of 20% of GDP for France, Germany and many
of the peripheral sovereigns themselves
Sharply higher costs of capital
Full range of meaningful indirect impact: already vulnerable; less lending; contagion; Eastern
Europe
Central Bank Policy Generally creates downward pressure on Central Bank tightening and “exit strategies”
Will vary by region: Little impact on U.S. Fed unless crisis spikes sharply; UK likely to extend
quantitative easing; Significantly increases full range of ECB considerations and variables; China will
continue to tighten as needed; Asia (ex-China) will likely pause on any tightening in current
environment
Bank Facilities Creates downward pressure on tenor (more focus < 3 years); would take sharp spike in crisis to
bring back down to Financial Crisis peak levels of < 365 days
Potential negative impact and focus on Risk Weighted Assets (and therefore capital)
Hedging via CDS becomes more expensive (as CDS widens); creates downward pressure on size,
and upward pressure on cost, of facilities
51
Summary of Potential Implications
Markets / Entities Impact Potential Implications (Depending on Crisis Depth)
Sovereign Bond Market Supply: increases already high needs coming out of the financial crisis to fund deficits
New Issue Conditions Spreads: Sharply wider; higher costs for “Peripherals” to be sure; contagion impact on other regions,
as well as developed European sovereigns (depending on role in potential bail-out and contagion)
Euro / USD basis could make USD market particularly attractive for European issuance
CDS: sharply wider for single names in particular; more liquidity in Index product; additional negative
premium for Euro members than U.S. and U.K. due to coordination challenges on EMU policy
Delays: Creates a heavy pause in what is otherwise expected to be a very high issuance year
Capital Flows Not very transparent at this time (due to 3 – 6 month lags in high quality data)
USD Assets: depending on depth of crisis, strong moves into USD assets likely (equities and bonds)
Strong overseas demand on US$ bond deals already apparent
Repatriation strategies: increased focus, especially for investors
Foreign Exchange USD: potential continued rally depending on depth of crisis and volatility
Euro: Increases downward pressure (currently on 9 month decline versus USD)
Euro as Reserve Currency: could slip on a trend basis (with potential benefit to USD, CAD, JPY and
gold); Euro sovereigns will clearly be viewed as 16 separate markets with distinct credit risk and
liquidity profiles
Commodities Price: If crisis escalates, economic drag and USD rally will create downward pressure on virtually all
commodity asset classes, especially oil.
Gold: Potentially positive benefit depending on depth of crisis and flight to quality; still unclear
Financial Regulatory Heightens focus on financial regulatory reform (both negatively and positively)
Reform Increases focus on derivatives (particularly on bank margin requirements for counterparty
exposures, and tighter regulation of certain products)
Sharply higher focus on systemic risk (more need for international coordination, systemic
regulator, Too Big to Fail, multi-jurisdictional focus, capital flows, leverage limits)
The impact on all of the above markets will ultimately depend on the depth of the crisis, the
effectiveness of the response, and the level of volatility and risk aversion that follows
52
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