Global Interdependence Center International Conference
Sovereign Debt Issues in the Eurozone Gregorio De Felice
0
Rome, 7 April 2011
Outline A major role in sovereign debt crises is played by foreign debt, even inside monetary unions Public and private debts alone are not good indicators Some fundamentals (current account balances, fiscal deficits) are improving in many Eurozone countries Government spreads will not drop soon There are many reasons why risk premia will remain high for some time 1
The drift in credit standing is linked to an excess of foreign debt All countries in the euro area now experiencing rating downgrades and fiscal problems had been running large current account deficits, leading a major worsening of the Net Financial Position vs. non-residents. Change in CDS spreads and Net Financial Position
100 50
FRA
0 NFP
BEL
NET
GER ITA
AUS
-50
IRL SPA
-100
GRE
POR
-150 0
100
200
300 CDS, 2010-07 2
400
500
Reliance on foreign capital more important than total leverage The strongest forward warning that a financial crisis was brewing came from trends in the countries’ Net Financial Position. The deficits of Ireland, Greece, Spain and Portugal have more than doubled since 2000. Total leverage and Net Financial Position (% of GDP) 80 60
low leverage, external surplus
40
BE DE
20 NFP/GDP
high leverage, external surplus
NL
0
FI
SL A
F
-20
IT
-40
SK
-60 -80 ES EI GR
-100 -120
low leverage, large external deficit
-140 100
150
200
250
300
PT
high leverage, large external deficit
350
400
450
Total Debt/GDP NFP: Financial Liabilities - Financial Assets for the Rest of the World Sector, year 2009. Total Debt: sum of loans and non-share securities for general government, households and nonfinancial companies. Source: Intesa Sanpaolo, based on Eurostat Financial Accounts and national sources 3
The outlook for current account balances is improving Austerity measures in peripheral countries also help in rebalancing current accounts. The most noticeable improvement is taking place in Ireland, where a surplus is now likely. Deficits will remain very large in Greece and Portugal, also due to debt servicing costs. Belgium is more unlikely to be drawn into the crisis, being a surplus country. Spain
Italy 0 -1 -2 -3 -4 -5 '01-'08 '09
'10
'11
'12
0 -1 -2 -3 -4 -5 -6 -7 '01-'08 '09
'12
3 2 1 0 -1 -2 -3 -4
Greece 0 -2 -4 -6 -8 -10 -12 '01-'08 '09
'10
'10
Portugal
'11
'12
0 -2 -4 -6 -8 -10 -12 '01-'08 '09
Ireland
'11
'10
'11
'12
Belgium 3 2 1 0
'01-'08 '09
'10
'11
'12
Percentage contribution on GDP – Forecast data in orange. Source: European Commission 4
'01-'08 '09
'10
'11
'12
Smaller deficits, smaller refinancing requirements Scheduled gross issuance by maturity (EUR bn)
Gross issues of medium/long-term bonds is expected to drop to EUR 835bn in 2011 from EUR 929bn in 2010; 40bn are explained by suspended Greek and Irish issues. Net issues will fall by around EUR 130bn. The amount of bonds reaching maturity in 2011 is EUR 530bn vs. EUR 490bn in 2010.
300 250 200 150 100 50 0 2-3 yr
5 yr
10 yr
15 yr 30 yr
50 yr
Inf l
Flt
Mt n
2010
202
231
268
71
53
9
46
34
17
2011 F
186
202
226
75
42
5
52
33
17
Scheduled gross issuance by issuer (EUR bn) 250 200 150 100 50 0 GER FRA ITA
SP
NE
BE
PT
AT
GR IRE
FI
SK
207 210 225 92
49
42
23
20
20
20
16
7
2011 F 199 198 197 94
49
39
18
21
0
0
15
7
2010
Source: Bloomberg, Intesa Sanpaolo
5
Significant progress in 2011, but more will be needed For Spain, Portugal, the Netherlands, Italy the adjustment planned for 2011 represents a sizeable part of the total adjustment required to stabilize the debt/GDP ratio. However, an additional correction in excess of 4% of GDP will be required for Ireland, Spain, France, Greece. Investors will not be satisfied with fiscal plans, and will wait for actual results. 15.0%
Planned in 2011
Baseline target
Debt to 60% in 20y
12.5% 10.0% 7.5% 5.0% 2.5% 0.0%
IRL
ESP
GRC
FRA
SLO
CYP
POR
SLK
NET
BEL
ITA
AUT
LUX
MAL
FIN
DEU
Planned in 2011
2.4% 3.2% 2.5% 1.6% 0.6% 0.3% 3.2% 3.3% 2.0% 0.2% 0.6% 0.7% 0.6% 1.3% 1.5% 0.9%
Baseline target
11.5% 8.4% 8.6% 5.6% 4.4% 3.8% 6.1% 6.4% 4.2% 2.3% 2.2% 1.7% 1.3% 2.2% 1.9% 1.5%
Debt to 60% in 20y 14.0% 8.7% 12.0% 6.8% 4.0% 4.0% 7.3% 6.0% 4.4% 4.4% 5.9% 2.1% 0.9% 2.6% 1.7% 2.1% Baseline target: net adjustment required to achieve a primary balance consistent with a stable debt/GDP ratio, with GDP growth at potential. Debt to 60% in 20y: net adjustment required to achieve a primary balance consistent with a 60% debt/GDP ratio in 2030 (Greece: 2050), with GDP growth at potential. Source: Intesa Sanpaolo estimates, based on Eurostat and European Commission data. 6
Age-related spending: outlook Increase in age-related expenditure, 2010-2060, % of GDP Germany
Spain
France
Italy
UK
EU-27
10.2
8.9
13.5
14.0
6.7
10.2
2.5
6.2
0.6
-0.4
2.5
2.3
2010
7.6
5.6
8.2
5.9
7.6
6.8
2060/2010
1.6
1.6
1.1
1.0
1.8
1.4
2010
1.0
0.7
1.5
1.7
0.8
1.3
2060/2010
1.4
0.7
0.7
1.2
0.5
1.1
4.6
4.8
5.8
4.3
4.0
4.9
-0.4
-0.2
-0.2
-0.2
0.0
-0.2
23.3
20.0
29.0
26.0
19.2
23.2
5.1
8.3
2.2
1.6
4.8
4.6
Pension spending 2010 2060/2010 Healthcare
Long-term care
Unemployment benefits & education 2010 2060/2010 Total 2010 2060/2010 Source: European Commission, Sustainability Report 2009
7
Government spreads will not drop any time soon Main factors preventing a decline in risk premia: Fiscal consolidation will take years; a large credibility gap means investors want to see results; Uncertainty about the capital needs of banks at the global level; The support mechanism is clumsy; for large mid-risk countries may even be a negative factor; The consolidation plan for Greece is not credible: (1) there is a funding gap in 2012 that will require further loans and (2) long run sustainability is unlikely to be achieved without a haircut on debt. Market is already pricing in a restructuring of government debt; Doubts on the plan for Ireland; Portugal may need support; Rating actions (rating agencies catching up with market valuations). 8
Bank fragility: recourse to ECB open market operations The recourse to the ECB open market operations as a stable source of funding remains high in some banking systems, and shows a deep interconnection between the sovereign crisis and stress in wholesale bank funding. Pressure on banks to deleverage further may weaken their ability to act as a buffer in this government bond market period of stress . Liabilities vs. the Eurosystem (% of total assets) Eurozone Spain Portugal Netherla Italy Ireland Greece France Germany Belgium Austria -5%
Public measures to support the banking sector 40
1.7% 2.0% 7.3% 0.8% 1.2%
Approved interventions (% GDP)
30
Realised interventions (% GDP)
25
8.2% 0.5% 1.4% 0.6% 0.9%
35
20.6
20 18.4% 15
12
11.1
8.3
10 5
36.5
2.6 1.4
0.7
1.3 0.7
0
0% 5% 10% 15% 20% % total assets change since end 2009
Capital endowement
Banking liabilitiy guarantees
Bank funding
Bad asset provisions
Total
Note: data for December 2010, except for France, Greece, Netherlands (November 2010). Data for Ireland do not include the special loans from the Central Bank of Ireland. Source: Intesa Sanpaolo, from various sources (European Commission, ECB and NCBs).
9
The May 2010 crisis management framework Fiscal consolidation
EFSF
Lower risk premia
ECB (SMP)
Debt sustainability
(Eventual) conditional support programme
Reform of EU economic governance
IMF
10
EFSF loans to increase the burden on other countries ■ The loan to Greece and the guarantees provided for the loan to Ireland create contingent liabilities equal to 11% of the Euro area’s cumulative deficit in the next three years.
■ The weight of the bail-out quotas of the individual countries relative to the planned deficit in the next three years ranges from a low of 3% for Slovenia to a high of 73% for Finland. The weight of the aid is considerable relative to future deficits (Bailout % cumulative deficit 2011-2013) 73%
14%11%13%14%
Source: European Commission, Intesa Sanpaolo 11
Slovakia
Slovenia
Finland
Portugal
Austria
Netherlands
3% Italy
France
Spain
9% 9% Greece
Germany
Source: European Commission, Intesa Sanpaolo
26%
19% 10% Ireland
0.8 0.7 0.6 0.5 0.4 0.3 0.2 0.1 0
Slovakia
Slovenia
Finland
Portugal
Austria
Netherlands
Italy
France
Spain
Greece
Ireland
Belgium
Germany
40 35 30 25 20 15 10 5 0
Belgium
The aid to Greece and Ireland impacts on the rest of the Euro area (EUR Bn)
New credit actions are possible Rating agencies are catching up with market valuations, belatedly downgrading sovereign issuers in the Eurozone. Ratings & Spreads 1200 y = 5.1763x2 - 184.77x + 1650.8 R2 = 0.8871
1000 Spread on 10Y Bund
GR 800 IE 600 PT 400
200
E
IT
0
SL
A
B
3
4
5
6
7
8
9
10
11
Average Rating Source: Intesa Sanpaolo
12
F FI 15 16 NL
SK 12
13
14
17
Debt rollover risks for peripheral countries Bonds maturing in 2011 ex T-bill (EUR Bn)
Bond issues % total euro issues 100
40% 35% 30% 25% 20% 15% 10% 5% 0%
ITA
SPA
BEL
POR
80 60 40 20 0 Feb Mar Apr May Jun
Germany Netherlands Ireland
Dec
Nov
Oct
Sep
Aug
Jul
Jun
May
Apr
Mar
Feb
Jan
Jan
Medium/long-term debt rollover risk
Jul
France Belgium Finland
Aug Sep
Oct
Italy Portugal Austria
Nov Dec
Spain Greece
Rollover risk (2011 issues % redemptions)
25% 280%
2011 Gross issuance / total debt T-bill outstanding /Total debt
263% 240%
20%
18.4%
208%
17.8%
196% 204%
202%
200%
14.8% 15%
14.1%
14.0% 13.6% 13.5%
13.0%
160%
182%
170% 164%
158%
158%
135%
120%
10% ITA
SPA
BEL
80%
POR
GER FRA
Source: Bloomberg, Intesa Sanpaolo 13
ITA
SP
NE
BE
PT
AT
FIN
SKK Euro area
A high cost of debt would easily derail the Greek programme With average cost of debt peaking at 6.5% in 2016-18, a stable primary surplus of 45% would cause debt peaking at 165% in 2018, and then drop gradually from 2020. But is a major drop of yields achievable with rising debt/GDP ratios? Assuming a trend growth of 2%, if debt servicing costs peak at 7.8% in 2020-25, the consolidation plan will fail even if the primary surplus exceeds 5% of GDP. How to ensure sustainable borrowing costs? (i) Through extension of the support programme and (ii) Through major debt restructuring once Greece is back to a primary surplus. Greece – Favourable scenario 10% 5% 0% -5% -10% -15%
Greece – Adverse scenario 180% 160% 140% 120% 100% 80% 60% 40% 20% 0%
-20% 1981 1991 2001 2011 2021 2031 2041 Deficit primary balance Debt (rhs)
10%
250%
5%
200%
0%
150%
-5% 100%
-10% -15%
50%
-20% 1981 1991 2001 2011 2021 2031 2041
0%
Deficit
Primary balance
Source: Intesa Sanpaolo
Source: Intesa Sanpaolo 14
Debt (rhs)
Portugal’s financial situation remains fragile Portugal presents debt rollover risks. Gross bond issues in 2011 will be 218% of bonds reaching maturity vs. 135% for Germany and 160% for Italy. Rollover levels are also high for France (203%) and Spain (202%). Supply-side pressure will ease in 2H11 with gross issues in line with maturities and 46% of the issue program has already been implemented. Early elections called for June 5th. New government in place not earlier than the end of June. Spain’s redemptions are better distributed and prefunding will be easier. Portugal: financing requirement (EUR Bn) Cash deficit
Bond redemptions
Spain: financing requirement (EUR Bn)
Tbill redemptions
Cash deficit
14 12 10 8 6 4
40 35 30 25 20 15 10 5 0 -5 -10
``
2 0 -2 Jan
Mar
May
Bond redemptions
Jul
Sep
Nov
``
Jan
Source: Bloomberg, Intesa Sanpaolo
Mar
May
Jul
Source: Bloomberg, Intesa Sanpaolo 15
Tbill redemptions
Sep
Nov
Euro spreads should be lower Italy-Germany spread (bps)
Spain-Germany spread (bps)
210
300 10Y BTP BUND
180
2Y BTP BUND
10Y SPG BBUND
250
150
2Y SPG BBUND
200
120
150
90 60
100
30
50
0
0 '07
'08
'09
'10
'11
'08
Belgium-Germany spread (bps) 140 120 100
10Y BE Bund
450 400 350 300 250 200 150 100 50 0 -50
2Y BE Bund
0 -20 -40 '08
'09
'10
'10
'11
Portugal-Germany spread (bps)
80 60 40 20
'07
'09
10Y OT BUND 2Y OT BUND
'08
'11
Source: Bloomberg, Intesa Sanpaolo 16
'09
'10
'11