Once the stable bedrock of the markets, the SSA sector found itself rocked to the foundations as concerns mounted about the ability of sovereigns to deal with the crisis that engulfed asset classes across the board – something largely viewed as self-inflicted in the first place.
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The European sovereign debt market emerged from a chastening second half of 2011 to start the year brightly, at least for healthy issuers. But the plight of Spain in mid-April served as a reminder that sentiment is still very fragile, and the market is unlikely to ever look as it did before the crisis.
The EIB took advantage of a liquid and highly receptive market for its paper over the first quarter. And while other supranationals and agencies were not slow in spotting the opportunity, it was the EIB that maintained what at times seemed like omnipresence in the market. This approach has enabled it to fund more than 60% of its total annual fundraising allocation of €60bn.
The tug-of-war between dealers and their sovereign clients over the posting of collateral relating to swaps exposures has entered a constructive new phase but with some banks stepping in with aggressive strategies, a solution is not yet guaranteed.
During the dark days of November when financial markets were in thrall to the eurozone sovereign crisis and Spanish and Italian bonds were in virtual free-fall, propped up by the central bank, the SSA sector was stung by a sudden and dramatic downgrade to Eksportfinans to junk. In addition to massive mark-to-market volatility, it triggered a sudden and frantic reappraisal of its peer group.
Earlier this year Indonesia and the Philippines joined the club of emerging market nations able to borrow larger amounts of money for longer periods on the international capital markets – proving they have come into their own on the international debt scene. But sustaining investor enthusiasm against a challenging global backdrop will require an unwavering commitment to structural reform.
Fears of counterparty risk have reshaped the landscape for banks involved in sovereign debt deals.
The retail-targeted Japanese primary bond market has undergone thorough changes resulting in a wider variety of issuers offering higher credit risk. Global and local market conditions have transformed the appetite of the Japanese retail investors, which in turn, pulled in different sets of SSA issuers.
SSAs’ return to the Kangaroo market en masse, but Basel III rules restrict local demand and chances of return to previous peaks
Less than sterling performances by credit ratings agencies during the debt crisis increased pressure for the EU to act. In March the new CRA watchdog, the European Securities and Markets Authority, completed its first review of the big three: Moody’s, Standard & Poor’s and Fitch. Several areas of improvement were identified but will the review lead to restoration of confidence in ratings?
Questions remain over the roles of the EFSF and ESM and whether they can really end the eurozone crisis for good, but for now the bazooka has done its job.
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