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The earth has been shifting particularly in Europe, and nervous relief that the tremors in Greece did not bring the market crashing down soon began to fade as hefty cracks appearing in Spain spoiled the party.
Sure, European government bond markets have been putting on a brave face, with sentiment in the first quarter surprisingly strong and bankers trying to stay cool about Spain’s deficit.
But the country’s rising yields have again raised the stakes at a time of thin liquidity and investors are once more asking if Europe’s austerity plans are, well, austere enough. Moreover, do its politicians have what it takes to address the fundamentals and restore growth?
How rapidly things can change. Despite low volatility in Q1, higher than expected issuance and a market hungry for paper from Triple A issuers, Easter revealed that cautious optimism can quickly give way to a darker mood about the outlook for many European sovereigns. This extended beyond the periphery of Spain and Italy to the core France and Austria and threatened to spread further.
Part of this may be because some of the first-quarter bounce – LTRO 2 aside – may have been the result of liquidity that had built up by late last year and which was released in a traditional early-year flood by the apparent solution to Greece’s problems. No source of funds is infinite.
But there are signs that some at least are taking steps to strengthen the mortar of the market against structural damage from future shocks.
Supranationals, for example, are responding to pressure for the need to post collateral against swaps exposures by edging closer to two-way credit support annexes. The process undertaken by banks regarding debt mandates is also changing and issuers are paying more attention to the credit quality of counterparties.
Ratings agencies have also been under the lens, and in March the European Securities and Markets Authority completed its first review of Moody’s, Standard & Poor’s and Fitch, identifying areas in which the big three can improve the ratings of sovereign debt, banks and covered bonds.
ESMA’s underlying mission to render SSA credit ratings relevant amid the myths and clichés that abound responds to the shrill demand for change – such as issuers rotating agencies or calls to ban sovereign ratings in crisis bailouts – and equally shrill opposition to reform.
Perhaps more importantly in the long term, as the earth moves in Europe, the ground on which emerging markets are being constructed begins to look more solid. Earlier this year, Indonesia and the Philippines, for example, both came of age by issuing 25–30-year bonds to an enthusiastic reception, able to employ strong macro-economic fundamentals keenly sharpened by structural reforms that provide an undeniable counterpoint to sickly Europe.
But the two continents also showed they can work together, one example being the Uridashi market in Japan that opens up a retail investor base to a largely European issuing fraternity.
Meanwhile, the Kangaroo market also bounced back to life, with the likes of the EIB, KfW and IBRD returning to the outback after a dire 2011.
But the ripples sent out globally by the scale of last year’s crisis and the tremors it caused in Europe clearly help to explain why April showers can still dampen sentiment, and put Spain’s unhappy Easter in context.
Yet, above the din, the chatter of voices talking up confidence in the market can also still be heard. After all, both the European Financial Stability Facility and the European Stability Mechanism are heavy-set confidence-building structures that respond to market pressure for a “bazooka bailout”.
Of course, we will never know whether they are fully up to the task unless an economy the size of Spain collapses.