Euro debt toxic in central Europe too?

December 12, 2011

Euro-denominated debt isn’t looking too popular in central Europe these days, with spreads in Hungarian and Polish euro bonds widening over the yields of dollar bonds with the same maturities.

Hungary — and to a lesser extent Poland — have been suffering from their exposure to the economies and banking systems of the euro zone.

But if it was just about the quality of these sovereign credits, their dollar bonds would have fallen as hard as their euro debt.

Investors say there could be several issues at play, including worries about the volatility of the single currency, its direction — with last week’s EU summit only increasing the dollar’s strength — and even whether the euro will still exist in the same form, with all the headaches that could mean for anyone holding euro-denominated contracts.

“We avoid euro-denominated debt, it’s cheap and getting cheaper,” Sergio Trigo Paz, global head of emerging fixed income at BNP Paribas Investment Partners, told Reuters Investment Outlook Summit 2012 last week, when discussing how the firm was making plans for a possible euro zone break-up.

The spread between Hungarian euro and dollar bonds due 2020 widened by as much as 70 basis points in the past few weeks, though the gap has closed in a little today as investors check out the implications of the EU summit.

For Polish euro and dollar bonds due in 2019, the spread has widened by around 40 bps.

Many cash-strapped European banks and fund managers, who are more likely to hold euro-denominated debt, have also been forced to pull out of riskier assets, and this may also be causing the underperformance of the euro debt.

Agnes Belaisch, emerging market strategist at Threadneedle, says:

“The asset base for these euro bonds are European investors, mostly bank asset managers and pension funds, they are mostly deleveraging. This affects credits that work and credits that don’t work.”




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