Last week, the spread between Greek bonds and German bunds widened to its widest since April after the Greek central bank warned domestic lenders they would have to wean themselves of ECB liquidity measures.
Greek banks, it turns out, had borrowed amounts proportionally greater than most other countries in the 16-nation euro area.
Accordingly, as BNP Paribas noted on Monday, 5-year Greek CDS spreads have crept nearer CEE 5-year CDS spreads in the last week:
BNP Paribas now believe CEE spreads will inevitably have to follow. As they noted (our emphasis):
The central bank of Greece created a wave of volatility when it revealed that it had invited domestic lenders to outline potential funding sources in the coming months just as the ECB begins limiting its liquidity provision to the European banking system. Discrimination between poorer credits will inevitably follow and this is currently being reflected in the widening of spreads with the recently downgraded Greece. We believe that it is only a matter of time before this move feeds through into local CEE, markets where funding issues are similarly important.
The market could use the current growing fears over the deterioration in the core-European countries’ public finances to scrutinise developments in countries on the periphery. The picture is somewhat mixed here. Hungary has embarked on a stricter tightening programme under the IMF umbrella, while both Poland and the Czech Republic have been indulging in anti-recession expenditure and suffering from pro-cyclical budgets that are exposing the countries’ fiscal weaknesses in times of contracting growth. Given the market’s short-sightedness though, the focus could once again turn to the overall indebtedness levels, which will point to Hungary and Poland being the riskier assets to keep hold of. Interestingly both the EBRD and IMF advocated that banks operating in the CEE depart from the “evergreening” of loans and start properly accounting for bad debts.
Related links:
It’s all Greek to the European bond market – FT Alphaville
A CEE stress snapshot - FT Alphaville
The return of widening sovereign credit spreads – FT Alphaville