MADRID | After a very tough year for almost any non-safe haven asset, a harsh 2012 begins, and Banco Santander analysts explain why:
“January opens with the implementation of the PSI in Greece and the presentation to the respective regulators of bank recapitalisation plans after the EBA tests (on 20 January). But just as important as all this, it starts, too, the most active quarter in terms of primary sovereign with the expected gross issuance of €804bn by our rates colleagues (Italy with €236bn and a threatening spread vs. Bund of almost 500bp at present). Also, if the pattern of the last eight years remains the same, c32% of the issuances would be launched during the first quarter (January is usually the busiest month).”
As far as credit is concerned, Santander experts assure that there has been an spectacular improvement in the liquidity rates of European banks.
“Besides the announcement of the decrease in the amount of the minimum reserve (-100bp up to1%) and the improvement in the collateral accepted by the European Central Bank (ECB), on the 21 December the central bank offered the first LTRO at 36 months (the second one will be held at the end of February). Plus, 520 banks requested €489bn at 1%; of this amount, €280bn approximately came from existing liquidity operations and c€210bn from new financing.
“The initial reading is being positive for the markets and the FinSen has experienced an improvement of close to 50bp since the middle of December. This improvement partially covers up poor behavior of credit in 2011: iTraxx Europe +69bp, mainly influenced by expansions in FinSen (+101bp) and SovX (+149bp).
“This is no surprise since: (1) one of the big uncertainties for the market is now resolved, especially aft
er the opposition of EZ to launching guarantees for the financial sector at supranational level; (2) also, the financing needs of the sector are reduced (we’ll have to revise our expectations of senior to €200bn and +3% in stock certificates to €300bn for 2012); (3) on the other hand, and in view of the elevated collateral contributed to the ECB (it’s lending has reached €870bn, similar to the maximum levels of June 09: €898bn), the offer of paper in circulation has been reduced (now discounted in the ECB). To all this it must be added the continued absence of primary market action and the building up of portfolios at the beginning of the year.
“In our opinion, for financials, the long term reading of the last LTRO will depend of the use made of the carry trade. In view of the new record of €452bn deposited in the ECB at the end of December (with a negative carry of 75bp) one could argue that the bank is just accumulating cash. In any case, the closeness of the closing of the year (window dressing meant to deal with further possible EBA tests) tells us that it’s too soon to evaluate what will be the future of this liquidity.
“In any case, we believe the improvement in the funding position far exceeds concerns over a possible subordination of senior debt to the amount of collateral deposited with the ECB. On the other hand, the spectacular rally of peripherals in recent days, especially on the short side, and the improvement in the funding position, indicate steepening movements in peripheral credit curves.
“In our opinion, and with this optimistic market environment (boosted also by an improvement in the PMIs), the beginning of January will be dominated by good volumes in the primary, particularly by stock certificates and corporate debt.”