By: Eshe Nelson
July 11, 2014
When asking Allianz SE’s chief investment officer about the euro area’s sovereign debt woes, be prepared for an emphatic response.
“The fundamental problems are not solved and everybody knows it,” Maximilian Zimmerer said at Bloomberg LP’s London office. The “euro crisis is not over,” he said.
While extraordinary stimulus from the European Central Bank has encouraged investors to pile into the region’s government bonds this year, that’s not a sufficient remedy for Zimmerer, who oversees 556 billion euros ($757 billion) at Europe’s largest insurer. Countries are still building up their debt piles, and that’s storing up trouble for the future, he said.
As Zimmerer was speaking, investors were getting a reminder of the volatility that was rife through the sovereign debt crisis that started in 2009, as sliding stocks and bonds of Portuguese financial institutions rippled across the region’s markets. Amid a four-day slump, yields on Portugal’s 10-year bonds ended yesterday 279 basis points higher than their German counterparts, the widest spread since March 18. The securities recovered some of their losses today, tightening the spread to 268 basis points at 10:27 a.m. London time.
“There is only one country where the debt level last year was lower than 2012 and this is a signal the debt crisis can’t be over, only a recognition of the debt crisis has changed,” Zimmerer said on July 9. “If the debt levels are not going down in the end we will have a problem, that is for sure.”
Euro-area governments are still grappling to get their debt under control in the wake of the region’s financial-market turmoil, which left five countries needing international aid and triggered the biggest restructuring in history in Greece. Only Germany reduced its debt-to-gross-domestic-product ratio last year, according to data published by the European Union’s statistics office in Luxembourg in April.
Allianz is reducing holdings of euro-area government debt to avoid low interest rates after the bond-market rally incited by the ECB, Zimmerer said. The Munich-based insurer is planning to move cash from fixed income into “real assets” such as infrastructure and real estate, he said.
Sovereign securities from the euro area’s so-called periphery nations have surged since ECB President Mario Draghi said in 2012 he’d do “whatever it takes” to safeguard the euro. Bonds extended gains this year as the ECB cut its main refinancing rate to a record-low 0.15 percent and said it would stay at current levels “for an extended period.”
That helped push the average yield to maturity on euro-area government debt to 1.29 percent on July 8, the least in the history of the currency bloc, according to Bank of America Merrill Lynch’s Euro Government Index.
Draghi’s promise has also left Zimmerer assured that markets will not revisit the levels seen in 2012.
“I do not expect a new crisis because the ECB sits there with a printing machine in their hand,” he said, referring to the ECB’s ability to take steps including buying assets to ensure stability. “So I can’t see why the market should go back to this kind of crisis mode we saw in 2012.”
Eighty-nine percent of Allianz’s investments are in fixed-income securities, while equities represent 7 percent and real estate and cash account for 2 percent each.
Portugal’s 10-year bond yields jumped 21 basis points yesterday, the most since September, amid concern that Banco Espirito Santo SA, its second-biggest lender, would become embroiled in the financial woes of a parent company.
Portuguese bonds rose for the first time in five days today after the bank sought to reassure investors by revealing its exposure to related companies. The lender also said it has a cash buffer above the regulatory minimum following a capital increase in June. Portugal only exited its three-year international bailout program in May.
“The Portuguese situation has been an ugly reminder of the sovereign-bank feedback loop,” David Schnautz, a fixed-income strategist at Commerzbank AG, said from Frankfurt. He was referring to the link between sovereign borrowers and their domestic banking systems.
“The bond market has been feeling much better than the real economic developments have been,” Schnautz said. “There have been improvements but certainly the bond market story has been more impressive and every once in a while we get this pronounced hiccup.”
That may not be enough to prevent further gains for Italian and Spanish securities relative to German debt, Zimmerer said. Germany’s 10-year yield was at 1.20 percent today after closing yesterday at the lowest rate since May 2013. Italy’s was at 2.92 percent and Spain’s was 2.80 percent.
Allianz holds 179.6 billion euros of government bonds, of which 19 percent are French securities and 16 percent each are from Germany and Italy, according to data from the end of 2013.
“There’s no value at all in bunds, they are pretty overvalued,” Zimmerer said. Italian and Spanish spreads will get tighter “because people are so desperate to earn some additional money. But they are very dependent on the political situation,” he said.
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