The Bank of Spain’s (BoS) Financial Stability Report usually puts its finger on the problem when it highlights the main risks affecting the banking business. As well as low interest rates and the deterioriation in both Spanish and global economic prospects, the BoS’ latest report points to another factor which has not warranted so much attention: the decline in the prices of financial assets, both in fixed income securities and equities.
J. L. M. Campuzano (Spanish Banking Association) | Debt is essential for growth. And in fact, the Big Recession, which was sparked by the US subprime crisis, lies in the high level of debt generated during the previous decade known as the Great Moderation. So just as periods of expansion are favourable for building up debt, this has to be adjusted during periods of recession (and depression).
It’s definitely not Telefónica finest hour. Problems with the possible listing of its UK affiliate O2 after the pound’s slump can be added to the fiasco with the IPO of its infrastructure subsidiary Telxius. The company is worried about having its rating cut and it doesn’t know how it can cut its massive 52 billion euros debt pile. But on Monday it returned to the debt market and successfully placed 2 billion euros in 4-year and 15-year bonds.
If a slowdown started in the Spanish economy for 2017, this would find Spain’s private companies in a healthy situation with regard to their debt: at end-2015, this was below the eurozone average (106.4% of GDP).
The recent uptick in long-term debt rates, with the German bund leading the way, is not only due to investors’ disappointment after the last ECB meeting. Experts highlight other factors such as the global economy’s slightly better-than-forecast performance and the expectations for a generalised round of fiscal stimuli in key economic areas. Public debt for financing this expansion would increase and this exerts upward pressure on the rate curve.
In an internal report, the IMF has confessed to errors linked to the bailouts in which it participated during the euro crisis, according to what Ambrose Evans-Prichard tells us. Just what the euro needed: explicit recognition, in black and white, that nothing could be done about the “infamy of competitive devaluation.”
AXA IM | Companies have re-leveraged their balance sheets since the global financial crisis (GFC), driven by low borrowing costs. Although heightened, corporate leverage is not currently excessive in developed markets, although we see signs of concern in emerging markets. In this note we assess whether we should be concerned about corporate leverage at current levels.
Investors’ fears and their hunt for safe haven assets are having an unsuspected impact on European public debt yields: nearly two thirds of these securities are in negative territory; the German bund is beating a new record low on a daily basis and Spanish debt is approaching the minimum levels recorded in April 2015.
UBS | In this report, we focus on three pivotal questions that we consider crucial for investing in any security in Spain: First, what is the economic outlook for 2016/17, and what are the biggest economic policy challenges that the next government will face? Second, what are the likely scenarios for the outcome of the elections on 26 June? And third, what is the valuation and relative attractiveness of Spanish assets, how will asset markets react to different election outcomes, and what is or is not priced in?
“Monetary stimulus is driving European sovereign debt towards irrational levels which are no reward for the risks involved and make any correction phases more dangerous,” say analysts at Intermoney.