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Capital Markets Weekly: Cyprus and Greece plan more debt sales and Italian problems resurface

26 April 2019 Brian Lawson

Bond issuance has been restricted by the Easter break. Among this week's few highlights, Cyprus has mandated banks to sell December 2024 and 30-year Euro-denominated debt imminently. The deal should assist Cyprus repay the EUR2.5 billion loan it obtained in 2011 from Russia, of which EUR1.57 billion is outstanding. Cyprus already sold 15-year debt at 2.75% in February 2019, gaining some EUR8 billion of demand for a EUR1 billion issue.

According to Ekathimerini website, Greece is considering various funding options in the context of its planned early repayment of IMF liabilities. These include a new three-year bond, reopening prior five and seven-year deals with taps, or a new medium-term deal over the next few months.
Italian debt faces potential renewed scrutiny after an Italian parliamentary commission suggested that it won't meet its target of raising EUR17 billion from privatization sales during 2019. A Financial Times report noted that Italy has slated 2019 receipts of 1% of GDP from privatizations, but that no specific plans have been announced. It further highlighted that the Five Stars party opposes any disposals of major state assets such as state holdings worth some EUR20 billion in Enel, ENI and Poste Italiane among others. Italy has already noted - in early April - that it will miss its deficit target of 2% of GDP this year, adjusting this to 2.4% and 2.1% in 2020 to reflect slower economic growth projections.

The other key development is further equity market strength. On 23 April, both the S+P 500 and Nasdaq composite indices reached new highs. The S+P index has risen some 25% from its recent low in late December 2018, and has gained 17% within 2019, while the Nasdaq index has now recorded a 22% gain in 2019. Additionally, Both Pinterest and Zoom's IPOs opened at strong premiums on 18 April: Pinterest closed first-day trading up 28% at USD24.40 while Zoom gained 72.2% to close at USD62 per share, and both have advanced further subsequently.

Our Take

Italy's 10-year bond yield has increased during April from a low of 2.4% to 2.67%, but this remains nearly a full percentage point below its levels as recently as mid-last November.

IHS Markit has warned consistently that Italy's fiscal targets are unrealistic, based on over-optimistic growth estimates both for the EU and for Italy itself. The stalling of its plans for state asset disposals appears near inevitable. In turn, this would ensure that the compromises reached with the EU would be breached heavily, increasing adverse potential pressure on its debt.

Our economist Raj Badiani previously has suggested that Italy will badly miss its agreed fiscal objectives. His latest forecast puts the deficit outcome at 3% in 2019, and 2.4% in 2020, versus the 2.04% level agreed with the EU for 2019. Overall, we see effectively-zero scope for Italy to meet its privatization target or to adhere to the deficit objectives it had agreed with the EU. This leaves its debt exposed to important price correction and potential periods of market dislocation.

By contrast, Cyprus already has made considerable progress in emerging from its past financial crisis. The heavy oversubscription for its 15-year EUR1 billion sale in February is a clearly-positive indicator for the pending sale of 30-year liabilities. Overall, Cyprus is making considerable headway in extending its debt profile and reducing debt-service risks by locking in favorable long-term rates.

Greece also has shown a positive indicator, along with an apparently less-favorable one. On 23 April, it announced that its budget surplus reached 1.1% of GDP in 2018, versus a revised 0.7% surplus in 2017. It previously had announced that it was on track to surpass its goal of a primary fiscal surplus (before debt service costs) of 3.5% of GDP in 2018. However, its debt-to-GDP ratio rose 5 percentage points to 181.1% in 2018, despite GDP expanding to EUR184.7 from EUR180.2 in 2017, according to Elstat data. However, this is attributable to official lending to Greece through the release of the last tranches of its rescue package. Long-term loans to Greece rose from EUR254.5 billion in Q4 2017 to EUR273.8 billion in Q3 2019, declining marginally to EUR273.3 billion in the fourth quarter. By contrast total debt securities outstanding fell from EUR54.9 billion to EUR52.9 billion between Q4 2017 and Q4 2018, with short-term bond liabilities falling by EUR3.3 billion.

Barring Greece and Italy (whose debt stock rose to 132.2% of GDP in Q4 2018, from 131.4% a year previously) the Eurozone's debt burdens have been improving. For the aggregate bloc, the debt-to-GDP ratio fell from 87.1% to 85.1%, while Germany's debt-to-GDP ratio fell to 60.9%, versus 64.5% a year previously, according to Eurostat.

Lastly, it is unusual for debt and equity markets to move in parallel, with this often indicating the presence of external risk-positive factors. The easier policy direction of both the Federal Reserve and ECB in 2019 versus prior expectations and apparent progress with trade talks between the US and China could represent positive drivers for both market segments. Over time, slower growth prospects suggest that equity markets risk losing momentum or reversing but current conditions seem favorable for potential supply in both debt and equity segments, with Uber's jumbo share sale expected soon.

Posted 26 April 2019 by Brian Lawson, Senior Economic and Financial Consultant, Country Risk, IHS Markit

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