They have drawn careful battle plans to beat their fellow shoppers. There are so many needs to cover already and so many people are trying to do the same… They are slightly worried that there might not be enough for everybody, at times they harbour the suspicion that shoppers may very well have foreseen their move and will cut back their bargain this year. Despite all, they approach boxing day with irrational optimism.
There are many people out there taking stabs at the amounts that will be issued. I have mushed these using a rigorously unscientific method into an arbitrary consensus of € 850 bn Eur. gross / € 500 bn. net issuance for the Euro area. It is amusing to have a look at predictions and see what are the underlying assumptions, if only to see that a great many analysts expect Portugal to keep out of the market, tacitly airing their view that this little Iberian country will be next to go belly up. The difference between net and gross are, obviously, amounts that will have to be rolled-over. This is generally regarded as affecting in a lesser extent the market, since holders of long-term debt are supposed to have an inclination to roll it over to maintain the structure of their portfolios
So, things are better than last year, aren’t they? Nomura figures that debt issuance will be 5% lower in 2011. This should make for less crowded debt shops, right? Well, maybe not. There’s a number of reasons why European peripheral countries might encounter problems, especially during the first quarter of 2011, even if overall issuance is lower than in 2010.
- Front-loading of issuance. After all the debt turmoil in 2010 and with a relatively quiet end of the year, who wouldn’t try to get a head start and try to make a cushion for possible rough patches in the debt road in 2011? Not many, I guess
- Heavy relative issuance by peripheral countries. Spain is due to issue a hefty 200 bn, Italy an astounding 375 bn and Portugal, when seen coming to the markets, is expect to try to grab 38 bn. Among the three, they make for three quarters of total Euro area gross public issuance. Their shares of Euro public debt supply in 2010 were 15%, 15% and 2,2%, respectively. Next year, they will jump to 23,5%44% and 4,5%. To put it short, it’s a lesser amount of debt, but of a much lower quality.
- Roll over may be not that easy next year, because:
- Investors holding to maturity might seek to reshape their exposure, considering recent activity in the debt market.
- There’s a good deal of new supply to choose from: Euro bonds, more attractively priced Italian debt, British quilts, etc. Especially the Euro bonds will attract a lot of interest, since they have better risk and yield than German bunds.
- Debtor countries qualification downgrades mean roll overs will be to a lower quality asset, which may deter some investors, even made roll over statutorily impossible for them.
Within this context, expect pile-ups at the figurative pawn shops that are bond markets. Who will make it first? Well, based on personal experience queuing with nationals of these countries, my bet is: first comes the EU, with the advantage of small size and superior speed. Then Italy elbows in, followed by Spain and Portugal, both with a considerable lag.
This is one classical example of European construction. It always starts by the roof and proceeds with some difficulty towards the foundations: woulndn’t it have been more sensible and believable to coordinate a simple matter such as issuance before floating the idea of an Euro-bond? Well yes, but we just can’t agree, so we launch an infinitely more complicated idea, like the Euro bond, let it take a life of its own and sort out details by itself. This is how we do it in Euroland.
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