Rollover risk breeding fear and trepidation, says HSBC’s Philip Poole
Philip Poole, global head of Macro & Investment Strategy at HSBC Global Asset Management, notes the fear among investors that eurozone sovereign debt faces a rollover challenge.
In the good old pre-crisis days developed market sovereign risk did not trouble investors. That was a problem confined to emerging markets, where history was littered with defaults brought on by inability to roll over (refinance) debt maturities. By contrast, developed world bond maturities came and went as investors rolled the proceeds into new sovereign issues. Eurozone bond yields reflected inflation expectations not the fear of default and the spread between peripheral and core issuers looked like it would stay tight forever, with investors scrambling to get the slightest pick-up in yield. How the world has changed. Now investors fret about sovereign default in countries where central banks are unwilling (or unable) to provide financial life support. Rollover risk bred fear and trepidation and bond yields soared for most of the eurozone periphery and part of its core, France included.
The problem isn’t inadequate liquidity. In fact, there’s no shortage of liquidity in the global financial system. It just isn’t getting to the parts where it’s needed most. Rather it’s ‘trapped’ in risk free assets – the likes of treasuries, bunds, gilts and gold. More liquidity from central banks is necessary but not sufficient for a solution. All central banks can do is buy time. The confidence trick that eurozone governments need to pull off is to convince the market that the 425 bps spread pick up over bunds for 10 year Italian BTPs (or 120 bps for French Oats) is an opportunity not a risk. If that happens, rollover concerns will wither and contagion from the eurozone to other markets will be yesterday’s story.
Beware the Ides of March?
Sovereign maturities in the Eurozone are concentrated in the first half of 2012 and rollover risk is particularly heavy in the first quarter with total refinancing requirements for Italy, Spain, Portugal and Ireland around €160bn, of which Italy accounts for almost €100bn falling due in February and March, equivalent to almost 30% of Italy’s total 2012 refinancing requirement. Greece also has a first quarter rollover concentration. In this case it’s all in March with some €17.5bn (35% of its 2012 refinancing requirement) falling due. This is the reason why a messy default is still a possibility – according to eurozone governments, unless a debt reduction deal is cut with private sector creditors Greece will not get the next tranche of financing from the so-called ‘troika’ and will be unable to make these payments.