Marcello Minenna. November 2013

Transcription

1 November 2013 One currency must have one interest rate term structure. Observing different government interest rates in the eurozone bond markets is like registering different prices for the same underlying asset Marcello Minenna Contract professor of Financial Mathematics at Bocconi University, Milano Head of Quantitative Analysis Unit, CONSOB The ideas and positions expressed in the work are personal views of the author and cannot be attributable to the institutions to which he belongs.

2 FINANCIAL CONVERGENCE OF EURO ZONE COUNTRIES 10-Years government bond rate Decision of the countries which had joined the euro Start of the Euro Greece joins the Eurozone 2

3 FINANCIAL CONVERGENCE OF EURO ZONE COUNTRIES 30% CONVERGENCE TRADE STRATEGY 25% 20% 15% 10% Greece Portugal Spain Ireland Italy France Germany 5% 0% January 1996 The Italian government issues 2 years BTP, yield 8% issue price 100 The German government issues 2 years BUND, yield 2,5% issue price 100 Buy BTP Forward 2 Years Yield 8% Sell BUND Forward 2 Years Yield 2,5% January 1998 The Italian government issues 2 years BTP, yield 5% issue price 100 The German government issues 2 years BUND, yield 2,7% issue price 100 Receive BTP 2 Years Yield 8% Sell BTP 2 Years Yield 8% (+106 ) Buy BUND 2 Years Yield 2,5% ( 99 ) Delivery BUND 2 Years Yield 2,5% Net Cash Inflows = 0 Net Cash Inflows = + 7

4 CONVERGENCE BETWEEN ECONOMIC CYCLES OF EU COUNTRIES 1,00 Correlation between the economic cycles of various Euro Zone countries and Germany ( ) 0,80 0,60 0,40 0,20 0,00 0,20 France Nethe rlands Austria Belgium Finland Italy Spain Portugal Ireland Greece

5 CONVERGENCE BETWEEN ECONOMIC CYCLES OF EU COUNTRIES Correlation coefficient between growth of regional and aggregate employment (national and EU) ,8 0,6 0,4 0,2 0 0,2 0,4 0,6 0,8 Provence Provenza (France) (Francia) Baviera Bayern (Germany) (Germania) Lombardia (Italy) (Italia) Cataluña Catalogna (Spain) (Spagna) Nazionale National UE EU 5

6 CONVERGENCE BETWEEN ECONOMIC CYCLES OF EU COUNTRIES Correlation coefficient between growth of regional and aggregate employment (national and EU) ,9 0,8 0,7 0,6 0,5 0,4 0,3 0,2 0,1 0 Provenza Provence (France) (Francia) Baviera Bayern (Germany) (Germania) Lombardia (Italy) (Italia) Cataluña Catalogna (Spain) (Spagna) Nazionale National UE EU 6

7 PUBLIC DEBT EUROPEANIZATION 100% Eurozone % Government Debt held by Foreign Investors 90% 80% 70% 60% 50% 40% 30% 20% 10% 0% Germany Germania France Francia Italy Italia Spain Spagna Greece Grecia Portugal Portogallo Ireland Irlanda

8 2007: subprime crisis 2008: Lehman brothers default INTERNATIONAL FINANCIAL CRISIS

9 INTERNATIONAL FINANCIAL CRISIS TRANSMISSION IN EUROPE CREDIT RISK MEASUREMENT 2007: subprime crisis 2008: Lehman brothers default

10 INTERNATIONAL FINANCIAL CRISIS TRANSMISSION IN EUROPE 2007: subprime crisis 2008: Lehman brothers default

11 INTERNATIONAL FINANCIAL CRISIS TRANSMISSION IN EUROPE GDP 2,2% 5,0% 2007: subprime crisis 2008: Lehman brothers default 3,6% 4,9%

12 THE BREAKUP OF THE UNIQUE INTEREST RATES CURVE Decision of the countries which had joined the euro Start of the Euro Greece joins the Eurozone Greek debt crisis explosion 12

13 THE BREAKUP OF THE UNIQUE INTEREST RATES CURVE Decision of the countries which had joined the euro Start of the Euro Greece joins the Eurozone Greek debt crisis explosion

14 THE BREAKUP OF THE UNIQUE INTEREST RATES CURVE Decision of the countries which had joined the euro Start of the Euro Greece joins the Eurozone Greek debt crisis explosion

15 SHADOW CURRENCIES/EXCHANGE RATE Interest Rate Parity Theory: a full pictures of German/Italian economics Italian Lira/Deutschmark Tasso Exchange di Cambio rate lira/mark Lira/Marco Govt Spread (BTP Bund) CDS Spread (IT DE) % CDS % BTP-Bund

16 SHADOW CURRENCIES/EXCHANGE RATE Interest Rate Parity Theory fails: only credit risk Italian Lira/Deutschmark Tasso Exchange di Cambio rate lira/mark Lira/Marco Govt Spread (BTP Bund) CDS Spread (IT DE) % CDS % BTP-Bund

17 SHADOW CURRENCIES/EXCHANGE RATE Large Financialization of the Economy 25 Financial Assets/GDP