Concerns that Spain and Portugal would follow Greece in calling for creditors to take a haircut on their debt led to a rocky day of trading on both sides of the Atlantic. While European leaders have previously promised that the Greek deal would be a one-time occurrence, the belief that Spain and/or Portugal would follow in Greece’s footsteps held back equities markets today. The Stoxx 600 Europe ended down 0.2 percent, while American indices had mixed results with the Nasdaq down over 0.1 percent in early trading, the S&P slightly up, and the Dow gaining almost 0.35 percent.
Greek Drama Continues to Pull Down Markets
The financial markets of Europe continue to be a waking nightmare for some as the drama surrounding Greece’s “orderly default” continues. On Friday, International Swaps and Derivatives Association stated that the forced write-down that most bondholders voluntarily agreed to, triggering the “collective action” clause, was a “credit event” and would trigger payment of credit default swaps to those bondholders holding them. This means that those bondholders who hedged their bets will be getting paid off, but it also means that those entities writing swaps on Greek debt will be taking a hit. As such, questions about who will be hurt most and who will gain are swirling throughout the European financial markets.
“People are looking around to see who is getting hurt on one side and on the other side who will collect,” Koen De Leus, strategist at KBC Securities, said. “It could trigger a sell off if you see a big bank having exposure to CDS and needs to pay a big amount.”
Also of concern is whether or not the same set of circumstances will simply repeat themselves. While European leaders have previously assured the world that Greece would be a one-time occurrence, including German Finance Minister Wolfgang Shaeuble just last week, the markets seem to be less sure that the eurozone will hold to this. Portugal, despite serious austerity measures, continues to have bond yields over 13 percent and could be headed for even more trouble. In an editorial, Bloomberg editors argued that Portugal, among other countries, should follow the Greek model for reducing its debt through an orderly default.
“Portugal is the prime one. Estimates of interest rates and economic growth from the International Monetary Fund suggest that, in order to keep its debt burden stable, the government would need to run a primary budget surplus (excluding debt payments) of nearly 2 percent of gross domestic product — a feat it has achieved in only three of the past 17 years. If it wrote down its debts by 40 percent, the required surplus would be a much more manageable 1 percent of GDP. Markets seem amply prepared for such an outcome: As of Friday, Portugal’s 10-year bonds were trading at a 47 percent discount to face value.”
The Bloomberg editorial also cites Ireland and Spain as prime candidates for a Greek-style default. However, Greece’s most recent bond auctions saw yields for 11-year to 30-year bonds trading between 13 and 19 percent, seeming to indicate that even the massive debt restructuring wouldn’t be enough to save Greece in the eyes of many analysts.
“Markets are telling us that Greece still faces a Herculean task,” said Louise Cooper, markets analyst at BGC Partners. “If the country’s problems were solved by the biggest ever sovereign restructuring ever and the first default in Western Europe for 70 odd years … then why are the new and shiny bonds trading for the first time today as junk?”
European financial stocks took a hit amidst continued concerns about sovereign debt. The National Bank of Greece (NBG) lead the losers by dropping over 4.5 percent, but it wasn’t along. Royal Bank of Scotland (RBS) was off just over 3.15 percent, Banco Santander (STD) lost over 1.85 percent, Lloyds (LYG) fell just under 1.5 percent, and Barclays (BCS) came down just over 1.5 percent. Deutsche Bank (DB) and UBS (UBS), though, managed to buck the trend with Deutsche Bank up over 1.5 percent and UBS up just over 0.75 percent.
China Concerns Also Weigh on Markets
Also affecting markets today was news that China’s trade deficit was much larger than anticipated. While most economists were predicting a deficit of about $8.5 billion for February, China instead reported a deficit of $31.48 billion, the largest in at least a decade. This came after the nation reported a trade surplus of $27.28 billion in January. The larger-than-expected deficit fueled fears of a slowdown in the Chinese economy as well as a broader global slowdown.