June 2010
MARKETS FLASH / June 2010
Impact of Greece downgrade ///
Fixed Income Management Department
Greece downgrade •
On Monday, June 14, 2010, Moody's downgraded Greece’s credit rating four notches from A3 to Ba1 (stable outlook), justifying its decision by the negative, medium-term, impact on growth of the fiscal austerity measures taken.
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Moody's believes that the rescue package from Europe and the IMF “automatically eliminates any short-term liquidity risk and encourages the implementation of a series of credible, achievable structural reforms and incentives that have a high probability of stabilizing debt service requirements at manageable levels.” However, “many uncertainties remain regarding the impact and timing of the initiatives (undertaken by the EU and the IMF) on Greece’s economic growth, especially in light of the less favorable global economy.” Thus, “the macroeconomic and implementation risks associated with the program are serious, and consistent with a Ba1 rating.”
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Fitch confirmed its BBB- (negative outlook) rating for Greece, and does not currently expect any new decisions regarding Greek sovereign debt.
Impact on markets •
This downgrade was widely expected by the market and Moody's merely aligned itself with S&P, which had already assigned Greece a speculative rating. In addition, the establishment of the “Securities Market Program” provides the full support of the ECB to Greek borrowings, in order to avoid any noticeable pressure on peripheral spreads. On June 15, 2010, central banks were buying up sales of Greek paper.
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All things considered, the downgrade has a limited impact on markets: U.S. markets dipped slightly on Monday, June 14, 2010 after the announcement (Dow Jones lost 0.20% and S&P 500 lost 0.18%). On fixed income markets, Greek spreads versus Germany widened during the day (+75 bp on 2 years, +50 bp on 10 years).
Impact on the major bond indices •
The major impact of this decision was the removal of Greek sovereign debt from certain indices (Citigroup, Barclays Capital, Merrill Lynch). This debt represents between 2 and 5% of the assets of the bond indices with a sovereign debt component and used by Natixis Asset Management portfolio managers.
www.am.natixis.com
MARKETS FLASH / June 2010
Management conclusions •
Greece: for several months, our scenario has emphasized the survival of the eurozone, as manifest in the financial support supplied to Greece by other eurozone countries, and as confirmed by the latest news (creation of the stability fund). We favored the purchase of Greek securities with short maturities (1-2 years) which provided an interesting carry opportunity and financial guarantees of repayment. Central bank purchases have stabilized rate levels: 8.5% for 2-year Greeks. On the longer maturities, we took advantage of central bank participation to adjust our portfolio and return to neutrality with respect to our benchmarks, as we were overexposed on the 3-5 year maturities.
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With regard to the other peripheral countries, we prefer to remain underexposed to Portugal, which still faces the threat of a rating downgrade. At the same time, the new announcements have induced us to return to our neutral position on Spain for maturities of less than 7 years, while remaining underexposed on long maturities. Similarly, we increased our exposure to short Irish maturities by remaining neutral on maturities over 2 years. Yields in Ireland are stabilizing, thanks to ECB purchases.
Written at 12:30 p.m on June 16, 2010, by the Fixed Income Management Department of Natixis Asset Management
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