The European debt crisis - a view from the market

Transcription

1 Fixed Income & Currency Sraegy I RESEARCH The European deb crisis - a view from he marke Royal Bank of Canada Europe Limied James Ashley (Senior European Economis) james.ashley@rbccm.com January 2, 21 This repor is priced as of marke close January 17, 21. For Required Conflics Disclosures, please see page 2. Overview The pas how did we ge ino his posiion? - Unsusainable imbalances/deb accumulaion was faciliaed by: (i) Marke failure inadequae/inaccurae pricing (ii) Regulaory failure poor financial i secor supervision i (iii) Policy failure - Sabiliy and Growh Pac The presen marke senimen o euro area sovereigns (i) Rising yields globally opimism vs pessimism (ii) Porugal and hereafer The fuure problems and soluions (i) Liquidiy vs solvency; role of he EFSF; credi easing; E-bonds (ii) Deb resrucuring? (iii) Core sovereign risk (iv) A permanen crisis resoluion srucure in Europe 1 1

2 The pas how did he we ge ino his posiion? 2 Unsusainable build-up of non-financial secor privae secor deb Ousanding deb of households and non-financial corporaes (% GDP) 4 4 % GDP Ireland Spain Porugal France Germany Ialy Greece Source: Haver, RBC Capial Markes 3 2

3 Marke failure: The mis-pricing of risk 1 1yr bond spreads over Bunds Porugal Ireland Greece Ialy France Spain 3 2 The "grea moderaion" Source: Bloomberg, RBC Capial Markes 4 Regulaory failure: Inadequae supervision and overly large financial secors 9 Banking secor liabiliies, % GDP 8 7 Ireland Germany

4 Policy failure: Idiosyncraic failures 7 Some of he key evens leading up o Ireland's bailou ish governmen guaranees banking secor Irish generic 1yr spreads over Germany 1 Ir Source: Bloomberg, RBC Capial Markes Anglo Irish Bank naion nalised Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 lised EBS naiona ranees exended Irish bank guar 8bn bailou announced Policy failure: The Sabiliy and Growh Pac Public finances across he euro area member saes: * 1 Gov balance, % GDP 43% 2% Gov deb, % GDP % 24% -1-2 * Char shows annual figures for individual EMU members from dae of euro adopion Source: Haver, RBC Capial Markes 7 4

5 Policy failure: The Sabiliy and Growh Pac Number of breaches of Maasrich fiscal crieria over he 11 years from Deb above Defici greaer One or oher, % han 3% % Finland % Luxembourg % Esonia 1 9% Ireland % Spain % Neherlands % Slovenia 3 27% Slovakia % Porugal 4% Cyprus 4% France 7 73% Germany % Ausria % Euro area % Ialy 11 1% Belgium % Greece % Mala 9 8 1% Source: Haver, RBC Capial Markes 8 The presen marke senimen o euro area sovereigns 9

6 Spreads have widened dramaically reflecing reappraisal of sovereign risk Generic 1 year sovereign spreads over bunds Greece Ireland Porugal Spain Ialy Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 Source: Bloomberg, RBC Capial Markes 1 Porugal s sovereign/financial nexus Poruguese banks' borrowing from he ECB 3 2 Credi o cenral governmen, % y/y Domesic credi ex general governmen, % y/y bn (LHS) % nominal GDP (RHS) Jan-8 Jul-8 Jan-9 Jul-9 Jan-1 Jul Source: Bank of Porugal, Haver, RBC Capial Markes 11

7 Porugal s (sovereign) financing profile for 211 bn 18 Redempions Coupon 14 Primary defici (surplus -) 1 Cumulaive funding needs 2-2 Jan Feb Mar Apr May Jun Jul Aug Sep Oc Nov Dec Source: Bloomberg, RBC Capial Markes 12 Spain s (sovereign) financing profile for bn Cumulaive funding needs 1 8 Redempions Coupon Primary defici (surplus -) Jan Feb Mar Apr May Jun Jul Aug Sep Oc Nov Dec Source: Bloomberg, RBC Capial Markes 13 7

8 Uni labour coss highligh compeiiveness problem Rebased: Q1 = 1 Germany Ireland Greece Spain Source: Haver, RBC Capial Markes 14 The fuure problems and soluions 1 8

9 A sylisic model of deb dynamics d (1 r g ). d 1 ps Key deerminan of susainabiliy 1 The conjuncural oulook in Ireland GDP, % q/q (LHS) -4 GDP, % q/q (RHS) HICP, % y/y Source: Haver, RBC Capial Markes Unemploymen rae, % M2, % y/y 3 M3, % y/y

10 A sylisic model of deb dynamics d (1 r g ). d 1 ps Key deerminan of susainabiliy 18 Public deb levels se o rise in all euro area economies his year Gern nal governmen defici &%GDP) General governmen gross deb, (% GDP) Esonia Luxembourg Slovenia European Commission 21 esimaes European Commission 211 forecass Finland Cyprus Slovakia Mala Spain Germany Ausria Neh Euro area Belgium Porugal France Ireland Ialy Greece 19 Source: European Commission, RBC Capial Markes 1

11 The fallacy of a good defaul Argenina 21 Argenina 22 General gov gross deb, % GDP - Ialy -8 Porugal Spain General gov balance, % GDP Ireland 29 (ex bank inervenions) Greece 29 Source: Haver, RBC Capial Markes 2 Spreads have been exraordinarily volaile recenly Generic 1 year sovereign spreads over bunds 1 Greece Ireland 9 Porugal 8 Spain Ialy Jan-8 May-8 Sep-8 Jan-9 May-9 Sep-9 Jan-1 May-1 Sep-1 Jan-11 Source: Bloomberg, RBC Capial Markes 21 11

12 Peripheral deb levels are manageable for he euro area as a whole 12 1 Core deb levels, rn Periphery deb levels, rn Euro area deb, rn Euro deb/gdp (RHS) IMF projecions Source: IMF, RBC Capial Markes 22 Tail risk 1: A downgrade o a euro area AAA sae 2 1 pp change in gov. deb/gdp raio, IMF projecions UK US 1 Ausralia Finland Neherlands France NZ Denmark Ausria Germany - Sw izerland Sw eden Norw ay Canada 21 general gov gross deb/gdp -1-1 Singapore Source: IMF November 21 Fiscal Monior, RBC Capial Markes 23 12

13 Tail risk 2: A downgrade o he US pp change in gov. deb/gdp raio, Ausralia NZ Finland Denmark IMF projecions Neherlands Ausria UK Germany France US - Sw izerland Sw eden Norw ay Canada 21 general gov gross deb/gdp -1-1 Singapore Source: IMF November 21 Fiscal Monior, RBC Capial Markes 24 Tail risk 2: A downgrade o he US General governmen balance, % GDP European Commission auumn forecass % GDP General governmen gross deb, % GDP -4 - Euro area US UK % GDP -12 Source: European Commission 4 US UK 2 Euro area European Commission auumn forecass

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