Your columnist finds himself in Munich for a summer getaway, far closer to the heart of the Greek debt storm than usual.
Over a latte on the famous Bayerstrasse, Asia suddenly seems very far away. I hope that’s true for the region’s debt markets, too, as dark clouds gather once again across Europe.
Grexit is the biggest storm brewing, although Putin’s expansionist agenda and the continent-wide threat of urban Islamic terrorism threaten more than summer squalls.
The former has become a ponderous topic, but one that isn’t about to go away. And as Greece prepares on Sunday for a referendum that may decide its membership of the eurozone amid a looming banking crisis, European credit markets are wobbling.
The European iTraxx crossover index widened 50bp on Monday as Greece hurtled towards default on an IMF loan and on a day when its banks were shut for business following weeks of withdrawals that drained around €50bn from the Greek banking system.
European credit markets hadn’t priced in Grexit after all, and you have to imagine they still haven’t. But whether a global market collapse along post-Lehman lines will be precipitated should the Greeks vote ‘no’ is moot. I believe not, but many do.
ASIA HAS SHRUGGED it all off, so far, with CDS spreads out by just 10bp at the height of the volatility on Monday. Bankers suggest that Asian credit has been supported by the bid from within the region, which has grown in critical mass since the financial crisis.
In apparent evidence of this, Asian investors were seen nibbling in secondary at last week’s slightly discounted prices, reinforcing the region’s resilience from meltdowns further afield that has become its hallmark.
Of course we’re talking about dollar-denominated debt, where the currency element of bond pricing is not for the time being an issue, while the rates component of Fed tightening is arguably priced into Asian spreads. The credit element is also not yet anything for investors in Asian debt to worry about, unless Grexit triggers a severe global recession as fears of the collapse of European monetary union take hold.
Nevertheless, while investors were willing to play in secondary, issuers were running scared and the primary market window was shut, bar an issue – bizarrely, in the wider context – in euros from China Huiyuan Juice.
Still, that deal had some idiosyncratic elements which steered it over the line, including credit enhancement via a standby guarantee from Agricultural Bank of China and big tickets from Chinese investors.
But let’s return to the issue of currency. That has always been the weak link for Asian credit, most obviously manifest in the Asian financial crisis which was precipitated by the collapse of a de facto currency pegging regime across the region almost two decades ago.
And let’s not forget the precipitous decline in the Indian rupee a couple of years ago, which caused spreads on offshore debt from Indian issuers to blow out amidst fears that debt service on dollar paper would become onerous when coupon and principal needed to be paid out from sharply diminished local currency cashflows.
More recently, spreads on offshore paper issued by Malaysian and Indonesian names have also underperformed as the ringgit and rupiah have dropped against the dollar, in the case of the former to levels not seen since the Asian financial crisis.
NO ONE APPEARS unduly worried. It might have seemed against the odds as the year kicked off, but G3 offshore Asian primary markets yet again broke the record for first half issuance, coming in at just over US$115bn.
There are reasons, perhaps, to be cheerful when it comes to confronting the Asian currency bogeyman. You could argue that the weakness manifested by the ringgit and rupiah is the result of a global phenomenon of traders having a go at currencies issued by countries which run current account deficits. But unless the Malaysian and Indonesian national accounts become utterly dire, that trade has a limited lifespan and is probably coming close to being unwound.
Meanwhile, from an Asian currency perspective, it helps that the Chinese renminbi is not freely convertible. One would imagine that the shenanigans in the eurozone as Grexit hovers might make the Chinese authorities less than gung-ho to rush to open up the country’s capital account. And, unlike the US, Japan and the eurozone, China has a lot of room to ease rates (which it did again last week) to counter a domestic economic slowdown. Less concern then, that China’s growing pile of offshore debt might face a similar sell-off to the one that confronted India a couple of years back.
Nevertheless, Asia’s sanguine take on Grexit might sour if the euro subsequently collapses. In the wake of Japan’s measured devaluation of the yen under the Abenomics regime, the economic policy now pursued by most key Asian countries is slow devaluation with the aim of retaining competitiveness in international trade.
Of course markets are well aware of that, and in the face of a plummeting euro, freely convertible Asian currencies are likely to become the target of short sellers.
In that situation, Asian credit spreads would be hammered, much as Indian spreads were and for the same reason.
I’ll leave that worry to others for now. On a summer’s morning in Munich the storm clouds seem far off and Asia a world away. For those whose livelihood depends on Asian credit retaining its resilience to global shocks, that sense of distance is helpful. Before the year ends, however, we will find out just how close Europe really is.
