More on the Eurozone Downgrades and Turkey (and other EMs)
Just a short follow-up to Monday’s Hurriyet Daily News column on the impact of Eurozone downgrades on Turkey, which was also posted here.
First, on whether the downgrades mattered. Let’s start with the short-run: For France, Spain and the EFSF, it didn’t, but for Portugal, it surely did. Speaking of Portugal, I am off to Portugal mid-February for a short vacation and to watch my beloved Black Eagles against Braga, so hopefully I will be able to do some field work. Who knows, I could even drive the 50 miles or so to the Spanish border and see for myself how Spain is doing and pay a visit to Vigo, the city of Los Lunes en el Sol…
But then you could make a case on why the downgrades would matter. In the column, I discussed one channel, that the value of banks’ holdings of sovereign debt fell. But the downgrades also mean that these governments are now less financially capable to bail out their respective banks. But when you think about it, this isn’t all that important, either- since it is the ECB that is doing the bailing out with its LTRO program:)…
As for the LTRO itself, I have read quite a few very interesting comments: For example, Robert Peston argues that it has made banks too dependent on the ECB, sort of zombie banks on artificial life support. A particularly interesting post is by Naked Capitalism’s Yves Smith, who argues that the IMF may be asking for extra funds because the ECB won’t go to distance with LTRO. In Yves’ words, “that while the ECB is clearly willing to do more than in the past, it is not willing to balloon its balance sheet to the degree the Fed did.” There is also a quite interesting post over at Macro and Other Market Musings on the (lack of) effective communication in LTRO as well as other recent ECB unconventional programs. And ZeroHedge believes the next version of LTRO will be smaller, and therefore we will not be seeing all that carry money that many, among them the Central Bank of Turkey, are hoping for. A good summary of many of these issues is provided by the Economist. In the longer-term, Wolfang Munchau argues that the downgrades are the beginning of a downward spiral for the Eurozone. Michael Schuman takes a similar stance, and Peterson Institute for International Economics presents both a rosy and dark outlook (by different people of course!) on the Eurzone’s future.
Finally, I’d like to return to my column: It was about the impact of Eurozone downgrades on Turkey, but we could generalize it to EMs. In fact, Morgan Stanley did just that in a research note published shortly after the column. Unfortunately, I cannot link to the document, but their main idea is “EM benefiting from improved relative and absolute creditworthiness over the medium term, but challenged by European financing needs in the near term.” In particular, they have this rather interesting graph where they show that recent “DM creditworthiness deterioration relative to EM has been associated more recently with a trend-rise in funding market stresses; no coincidence to us given the crowding out of available funding that DM creditworthiness deterioration entails”. Then, “these rising borrowing costs and lack of availability of capital to roll over external liabilities (reflected in higher funding market stress) – in addition to the adverse impact on EM economic activity from slowing external demand – may increasingly impinge upon EM prospects”. There is also the issue of crowding out, as DMs offer higher yields: “Furthermore, irrespective of more favourable perceived creditworthiness for EM versus DM sovereigns, the higher funding costs for DM sovereigns and banks are likely to crowd out funding for other borrowers, EM issuers included.” All in all, they are seeing a gradual shift to EMs over time, as these countries acquire more of a safe haven status…
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