In an email to subscribers, Hedgeye analyst Matt Hedrick explains why he is continuing to short the Euro. It seems he is not confident (like many other investors) in the ability of the PIIGS to rid themselves of gluttonous budget deficits and rising debt-to-GDP ratios.
The credit downgrades foreshadow quite nicely, too.
Hedgeye: As we noted in our post “Politics vs. Pragmatism” last week, despite the decision by the EU and IMF on 3/25 to “safeguard financial stability” in Greece, sovereign debt imbalances (especially among the PIIGS) remain at large and continue to heighten investors’ fears. Regarding Greece, most recently credit markets are clearly indicating heightened risk via rising bond yields.
In the first chart (below) we highlight that since 3/25 the yield on the 10YR Greek Bond has jumped a hefty 25bps. And while 10YR yields for the other PIIGS have held pretty steady over the last weeks (chart 2), we’d expect to see them to push up in the coming weeks as Greece shares more of the “sovereign debt” spotlight. Note that Portugal’s credit rating was recently cut to AA- by Fitch Ratings; we’d expect to see a downgrade of Spain in the coming weeks. For reference on the total debt and budget deficit constraints afflicting the PIIGS, see chart 3 (shown below).
Where else is this fear showing up?
* The equity markets of Spain, Greece, and Portugal are among the worst global performers YTD, down -7.3%, -4.6%, and -3.6% respectively.
* Moody’s downgraded five of the nine Greek banks it tracks yesterday, saying the “country’s weakening macroeconomic outlook and its expected impact on these banks’ asset quality and earnings-generating capacity.” (a lagging indicator, but representative of consensus).
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