Divyang Shah, Senior IFR Strategist
The political aspect to investing in peripheral debt can be seen by the market focus on:
1) slush fund related political troubles in Spain
2) the rejection of plans for political healing in Portugal
3) the Greek funding hole remaining wide open and
4) the Italian government constantly trying to avoid a collapse.
The impact of politics on investor mindsets has been summed up nicely by the head of China’s SWF who said that it will not buy peripheral debt as the “risk and returns of these bonds are determined by politics, and it is very hard for us to make a judgment”.
Support for austerity is on the decline but we have yet to see a significant shift toward pro-growth policies with the ECB lacking the willpower to embrace more significant easing of policy.
Fiddling with austerity targets and conventional monetary stimulus just does not do the trick, helping to prolong the downturn and further weaken the political and voter support.
There remain plenty of triggers for a resurgence of the eurozone crisis but the hope is that these will be kept in check until after the German elections.
The problem with playing for spread widening is the negative carry, so widening is unlikely until we get a trigger in play.
