Position: Long Germany (EWG); short Italy (EWI); Emerging Market Eastern Europe (ESR)
Despite the news focused on the uprisings throughout MENA, European sovereign debt concerns have not gone away. Sovereign CDS spreads continue to trend higher, with Greece just shy of an all-time high and Portugal making a formidable move since early February (see 1st chart below). Additionally, our Risk Monitor for European banks shows a widening for the Greek banks week-over-week, bucking the trend of tightening across most European banks: tightening for 31 of the 39 reference entities and widening for 8 (see 2nd chart below).
The sharp rise in Greek swaps may be attributed to a few emerging factors within the last week:
- Rising uncertainty surrounds Germany’s position on a permanent Eurozone bailout package. With numerous state elections this year, Merkel must show strong fiscal discipline regarding a permanent package for the region’s insolvent members. Currently, both Greece and Ireland are looking to receive more favorable interest rate terms and/or an extension on payback schedules. Ahead of the EU Summit on March 24-5, the suggested deadline for a new “comprehensive” bailout package, Merkel and her Finance Minister Wolfgang Schaeuble are firmly opposed to the rescue fund directly purchasing Eurozone member government bonds. Greece, like Ireland, is shaking as investors worry the country will not be able to meet its debt schedule.
- Last week further attention was given to the growing “I don’t pay” movement in which more and more Greeks are refusing to pay for road tolls, bus tickets, and other public charges.
- Today Moody’s downgraded Greece credit rating by three steps on rising default risk (Ba1 to B1).
We continue to monitor the EUR-USD closely. We’d expect to see swings in the currency pair as European leaders will be pressed to agree on an all encompassing package for a region of economically unequal and politically divided states. Based on our models, the EUR-USD is currently overbought in a TRADE (3 weeks or less) range of $1.38-$1.40.