Italy could be heading for a deeper recession

2020 ◽  
Keyword(s):  
Euro Area ◽  
Yield Spread ◽  
German Government ◽  
Government Bonds ◽  
Content Type ◽  
Borrowing Costs ◽  
The Imf

Subject Italy's economy. Significance According to the forecasting firm Ref Ricerche, Italy’s economy could contract by as much as 3% in the first half of 2020 following the outbreak of COVID-19. The yield spread between Italian and German government bonds has widened considerably, raising fears of another crisis for Italian banks, as many of them hold substantial amounts of government bonds. Moreover, even when the COVID-19 crisis starts to abate, demand could take a while to pick up, while it will also be difficult to encourage concerned investors to buy Italian bonds. Impacts Italy is likely to need several fiscal packages to deal with COVID-19; this would increase borrowing costs and worry investors. Absent a speedy recovery, Italy will probably need bailout funding from the euro-area and potentially the IMF. A lack of EU solidarity with Italy, which has already been evident, will play into the hands of Matteo Salvini’s League party.

The ECB will set the speed of global credit tightening

2018 ◽  
Keyword(s):  
Financial Market ◽  
Euro Area ◽  
Market Volatility ◽  
Government Bonds ◽  
Content Type ◽  
Bank Of Japan ◽  
Global Growth

Significance The ECB's plan could tip the scales towards tighter credit conditions globally. However, there are concerns about global growth -- particularly in the euro-area -- and government bonds are proving extremely sensitive to hawkish policy, fuelling financial market volatility. Impacts The VIX index of anticipated US equities volatility is back near a record low, but volatility may rise and remain higher than recent years. Fed rate hikes and US growth outpacing the euro-area will strengthen the dollar although the euro briefly rose on the news of ECB tapering. The ECB trails the Fed by some years in policy tightening and forming a plan for unwinding QE; this divergence will also boost the dollar. The Bank of Japan is buying vast quantities of government bonds and has no plans to remove stimulus as inflation is far below the 2% target. Investors are appreciating and trusting Fed Chair Jay Powell's attempts to speak plainly and less formulaically than predecessor Yellen.

More negative-yield bonds raise euro-area bank risks

2019 ◽  
Keyword(s):  
Interest Rates ◽  
Euro Area ◽  
Public Ownership ◽  
Government Bonds ◽  
Japanese Market ◽  
Content Type ◽  
Share Prices ◽  
Bank Risks ◽  
Positive Return ◽  
As If

Subject Negative yields. Significance Bonds with negative yields to maturity (NYTM) account for about 17 trillion dollars of outstanding government bonds, including the entire German Bund curve. NYTM have been embedded in the Japanese market since 2016. Yield-to-maturity (YTM) calculations are theoretical, as if interest rates turn positive over the lifetime of the bond, investors can still earn a positive return as they can reinvest the coupons. However, the German Debt Agency has started issuing zero-coupon bonds, locking investors into a negative return. Impacts Even more negative ECB interest rates on deposits will further squeeze euro-area banks, and their share prices will languish. A euro-area bank flagging that its equity and reserves cushion has eroded and it may collapse may be taken into public ownership. Germany’s NYTM experience is deeper and is occurring faster than in Japan (where institutions have had more time to adapt), raising risks.

Yen surge to question global monetary easing's effects

2016 ◽  
Keyword(s):  
Interest Rates ◽  
Central Banks ◽  
Recent Improvement ◽  
German Government ◽  
Monetary Policies ◽  
Government Bonds ◽  
Content Type ◽  
Negative Interest Rates ◽  
The Us ◽  
Fiscal Support

Significance Despite aggressive easing by both the Bank of Japan (BoJ) and the ECB, including negative interest rates, the lowering of expectations over the scale and pace of rate hikes by the US Federal Reserve (Fed) has negated their attempts to weaken their currencies and thus boost export-driven growth. This is heightening concern that ultra-loose monetary policies have passed the point where they can revive growth and inflation. Impacts Despite the recent improvement due to the oil price rebound since mid-February, sentiment towards EM currencies will remain fragile. The still strong demand for 'safe-haven' assets, such as German government bonds and gold, implies investors will remain cautious. Negative deposit rates will further undermine banks' earnings, amid persistent concerns about capital levels. Central banks will reach the limits of their capacity to promote growth without fiscal support from governments.

Germany to wait out major EU decisions until post-2017

2015 ◽  
Keyword(s):  
Euro Area ◽  
Debt Relief ◽  
French Elections ◽  
Content Type ◽  
Greek Crisis ◽  
Eu Referendum ◽  
The Uk ◽  
Party Family ◽  
The Imf

Significance The Greek crisis has exposed Germany's euro-area dominance more clearly than ever -- to both Germany's partners and Germany, and to the discomfort of both. Merkel's decisions in the crisis have reflected in part her wish to buy time until after the 2017 German and French elections, and her belief in the continuing importance of the Franco-German relationship. Impacts Belying German hopes the three-year Greek deal will buy time until after 2017, October could see a new clash over debt relief and the IMF. Given the alternatives in Paris, Merkel will hope more strongly than usual for a new French president from her own party family. Waiting for stronger leadership in Paris could risk fuelling French eurosceptics' charges that France lacks influence. Seeing major 'future EU' initiatives only after the 2017 German and French polls, Berlin would like the UK EU referendum also over by then. Germany's wish to postpone major EU reforms will limit the scope of any pre-referendum deal with London.

Monetary tightening could skim frothy markets

2017 ◽  
Keyword(s):  
Financial Market ◽  
Bond Markets ◽  
German Government ◽  
Government Bonds ◽  
Content Type ◽  
Bank For International Settlements ◽  
Quarterly Review ◽  
Asset Classes ◽  
Market Valuations ◽  
Government Coalition

Subject Risk assets. Significance The Bank for International Settlements (BIS) warned of frothy financial-market valuations in its quarterly review on December 3. Overvaluation in several asset classes, including US equities and benchmark government bonds, in combination with monetary-stimulus withdrawal, increases the scope for a correction. Impacts Investors will continue to seek yield. Robust European growth will strenghten the euro against the dollar despite worries over the progress of German government coalition talks. Investors are worried about equity valuations, but a sustained sell-off is unlikely to occur without a sharp repricing in bond markets.

Moderation is waning in Italy-EU conflict

2019 ◽  
Keyword(s):  
European Commission ◽  
Euro Area ◽  
Fiscal Rules ◽  
Right Wing ◽  
Content Type ◽  
Borrowing Costs ◽  
Deficit Reduction ◽  
Parallel Currency ◽  
Excessive Deficit Procedure ◽  
The Eu

Subject Italy's budget conflict. Significance June 5 marked a resumption in hostilities between Italy and the EU, after the European Commission sent a letter to Rome saying its spending plans were breaking EU fiscal rules. The Commission will now begin the process of implementing an excessive deficit procedure (EDP) against Italy aimed at reducing its deficit and debt. This will likely involve deficit reduction measures that could precipitate the collapse of the populist government. Impacts If an EDP is blocked, efforts to launch it will start again in September if Italy’s budget preview shows Rome not complying with EU rules. An EDP could lead to higher borrowing costs and make it more difficult for Rome to reduce its excessive debt, which is around 132% of GDP. A League-led right-wing government would push for aggressive tax cuts, potentially leaving Italy in the same predicament that it faces now. The implementation of a parallel currency to boost the supply of money would fuel concerns that Italy is prepared to leave the euro-area.

Greece's TARGET2 balance could bring broader losses

2015 ◽  
Keyword(s):  
Real Time ◽  
Euro Area ◽  
Financial Stability ◽  
Balance Of Payments ◽  
Transfer System ◽  
Government Bonds ◽  
Content Type ◽  
Greek Government

Subject Exposure of euro-area countries to Greece through TARGET2. Significance The exposure of euro-area countries to Greece occurs mainly through the assistance plans, including 53 billion euros (57 billion dollars) of bilateral loans and 131 billion euros of European Financial Stability Facility (EFSF) loans, together with about 25 billion euros of Greek government bonds held by the Eurosystem. Since the January election, Greece has been experiencing large deposit outflows and its banks are relying on the ECB's emergency liquidity assistance (ELA) facility for refinancing. The money withdrawn is partly transferred abroad, as could be inferred by Greece's Trans-European Automated Real-time Gross settlement Express Transfer system (TARGET2) balance. Impacts Greece's balance-of-payments crisis is causing TARGET2 debt build-up on top of its outstanding loans and bonds. At end-February, Greece's TARGET2 balance stood at minus 91 billion euros; it is likely to have deteriorated further in March. Including Greece's TARGET2 debt, the total euro-area exposure to 'Grexit' risk amounts to 300 billion euros.

Markets may misjudge risk of Greek exit from euro-area

2015 ◽  
Keyword(s):  
Euro Area ◽  
Ownership Structure ◽  
Public Debt ◽  
Focal Point ◽  
Quantitative Easing ◽  
Southern Europe ◽  
Bond Yields ◽  
German Government ◽  
Content Type ◽  
Private Investors

Significance While the scope for widespread contagion across Southern Europe is much more limited this time around because of the new ownership structure of Greece's public debt -- more than 80% of the stock is held by the official sector, in stark contrast to end-2011 when private investors held the bulk of Greek bonds -- a loss of confidence in the ECB's ability to implement a credible and effective programme of quantitative easing (QE) could increase investors' sensitivity to Greece's political woes. Impacts Despite Greece's re-emergence as a focal point for market anxiety, the bond yields of Portugal, Spain and Italy remain at near-record lows. This is partly due to market expectations of full-blown QE by the ECB. Yet Draghi must come up with a QE programme that is both credible and has the backing of a German government wary of further credit risk.

Negative euro-area bond yield universe will expand

2015 ◽  
Keyword(s):  
Euro Area ◽  
Sovereign Debt ◽  
Bond Yields ◽  
Government Bonds ◽  
Content Type ◽  
Bond Yield ◽  
The Us ◽  
Debt Issuance ◽  
Low Levels ◽  
Lift Off

Subject The euro-area government bonds outlook in the wake of the ECB's QE. Significance Strong demand among investors is pushing down yields on both government and corporate debt to unprecedentedly low levels, creating a rapidly expanding universe of negative bond yields. According to Royal Bank of Scotland (RBS), approximately one-third of euro-area government bonds now trade with a negative yield, including more than 50% of German, French, Dutch and Austrian public debt. Of the ECB's 60 billion euros (65 billion dollars) of monthly bond purchases, about 40 billion euros are estimated to involve government bonds, exceeding net government debt issuance across the euro-area. Therefore, yields are likely to fall further in the short term. Impacts Strong demand for 'safe haven' assets is compressing yields on government and corporate bonds, with negative rates on many securities. About one-third of euro-area sovereign debt is currently trading with a negative yield. The ECB's bond purchases and a relative scarcity in debt issuance will contribute to lower euro-area bond yields further. Persistent fears about growth and inflation will also contribute to lower yields. Negative yields will exacerbate the mispricing of risk, as investors bring forward their expectations regarding the US rates lift-off.

Euro-area bond sell-off will be a technical correction

2015 ◽  
Keyword(s):  
Euro Area ◽  
Sovereign Debt ◽  
Government Bonds ◽  
Content Type ◽  
Bear Market ◽  
The Past ◽  
Us Economy ◽  
The Us ◽  
Technical Factors ◽  
Global Growth

Subject Reasons behind the current bond sell-off. Significance The sharp fall in the prices of government bonds, which has wiped 450 billion dollars off the value of sovereign debt over the past month, is attributable to crowded positioning by investors. It is unlikely to be the start of a 'reflation trade' stemming from a sudden improvement in the prospects for global growth and inflation. While there is debate about whether the sell-off in longer-dated government debt since mid-April amounts to the start of a bond bear market, the modest recovery in the euro-area and the renewed weakness of the US economy suggest technical factors are at work. Impacts The two main consensus trades (long European equities and government bonds and short the euro) are being unwound. The euro-area government bond sell-off is probably a 'buy the rumour, sell the news' trade after the ECB's QE announcement. The sell-off in long-dated government bonds is not spreading to corporate debt and to EM currencies.

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