In a recent report from Societe Generale (EPA:GLE) (PINK:SCGLY) (BIT:GLE) research titled, Bank Credit Outlook – A liquid summer?, analysts saw little reason for celebration at this point in time. While not an entirely a doom and gloom summer, the group suggested keeping an eye on Spain and Italy in the near-term before entirely dipping your toes in the water.
With this forecast, analysts saw a few things holding the marketplace back with these key, well, NO points:
- The European Stability Mechanism (ESM) has a ways to go before activation.
- There’s been no Greek exit (also known as Grexit).
- Bank downgrades by Moody’s Corporation (NYSE:MCO) are complete.
- There’s been no direct EU lending to Spanish Banks.
- No Eurobond, no Euro-wide deposit scheme and really no one cares about Italy’s sovereign risk.
But what should investors keep their eyes on over the next few months? The Spanish sovereign rating and Italy’s government debt performance.
While usually one would expect a summer holiday from these troubles, not so much this year. Analysts also expect returns to come from sentiments rather than fundamentally based for the next few months.
So what’s Soc Gen’s assessment?
Credit investors may want to wait and dip their toes in the EU bank water until the third quarter. For now, stay close to the shore. Or more specifically, stay away from peripheral debt–unless you are ready for sentiment–driven volatility.
As for the Euro, analysts expect the primary market to be selectively open for core-EU banking champions but more global markets will stay open for the Nordic borrowers. One issue to keep an eye on is the senior bail-in but investors could start to price this into new, longer-dated, issues–should any come around.
Investors will be affected by ratings migration, but not senior bank debt burden sharing. Analysts expect those risk-averse investors to continue leaving periphery debt on ratings migration risks. This isn’t a bad thing: it could produce buying opportunities for some.
With swap gains included in fixed senior and fixed-to-floating rate sub debt, this should have a soft floor on
issues with these dormant accounting gains. Lower tier II could benefit from this but most will get some play from the call option.
Tier 1 debt will stay as a big backend step as opposed to smaller-sized steps. For most of the third quarter, liquidity could stay weak.
Most pundits and sell-side firms tend to issue vague reports. This one from Societe Generale (EPA:GLE) (PINK:SCGLY) (BIT:GLE) appears to be no exception. It seems that the bank is advising investors to be ‘cautiously optimistic.’