We can’t help but notice the contrasting approaches to, in effect, federal state solvency on either side of the Atlantic. The US authorities have recently said that they have zero appetite for lending money to individual States to help them meet their liquidity needs – despite the indebtedness of so many of them. Meanwhile, the European Union are looking at ways to increase the size of their bailout fund to rescue their needy States and leaking (as some have reported) to the press their desire for one of them – Portugal - to accept a rescue package. Certain professional investors are even more pessimistic about Portugal and Spain’s main banks than they were pre Christmas. The sovereign bond picture for Portugal is also a story of recent negative sentiment. By contrast, Italy’s banks have seen recent short covering showing that some are inclined to think that they are in better health.
Companies mentioned in this report include; Barclays (LON:BARC), HSBC Holdings (LON:HSBA), Royal Bank of Scotland (LON:RBS), BNP Paribas (EPA:BNP), Credit Agricole (EPA:ACA), Erste Group (WBAG:EBS), Piraeus (ATH:TPEIR), EFG Eurobank (ATH:EUROB), Basler Ktbk (SWF:BSKP), Banco Comercial Portugues ( ELI:BCP), Banco BPI (Public, ELI:BPI), Banco de Valencia (MCE:BVA), Banco de Sabadell (MCE:SAB), Banco Populare (ETR:B8Z), UniCredito Italiano (ETR:CRI), Unione Di Banche Italiane Scpa (BIT:UBI) and Banca Monte Dei Paschi Di Siena Spa (BIT:BMPS).
It is tempting to think that the media are playing a critical role that will determine whether or not Portugal can avoid a bailout. Was the media frenzy over the Irish situation a symptom or a cause of their eventual need for EU financial aid? However, if we take a step back, the dispassionate fact is that Portugal cannot indefinitely fund its deficit while it has to pay close to 7% interest on its national debt, especially since its slowing economy will negate the positive effects of cost cutting and higher tax rates.
Does the success of today’s small auction of EUR 1.25bn of new bonds at yields of 6.7% and 5.4% show that confidence has returned? Other than some tub thumping by Portuguese blog posters, the FT blog Alphaville is alive with comments from people saying that the yield is, ‘simply not low enough to put Portugal on a sustainable path. The debt/GDP (ratio) is likely to get higher. Bailout coming.’ Main Street has spoken.
This observation is presumably why so many Portuguese Government bonds have seen a recent increase in borrowing demand. This could either be banks borrowing the bonds to hedge credit default swaps or to cover a straight short sale, but either way this reflects investors positioning their funds to profit from a fall in value. But, in the context of the last 12 months this rise only takes the aggregate borrowing demand in their sovereign bonds to average levels and below what is was this time last year and during the late Spring panic over the solvency of the Eurozone. Negative sentiment is expressed by institutions further lowering their stakes in many Portuguese sovereign bonds.
The particular issues seeing a recent increase in the value being borrowed are: 5.45% 23 Sept 2013, 3.2% 15 Apr 2011, 4.375% 16 Jun 2014. If we compare the aggregate lending fee for all Portuguese Government bonds it is the second most expensive to borrow after Ireland but ahead of Greece. This is because 6 of the 20 lines that institutions make available for lending see the demand greater than half of the supply. Though the lending fee is expensive on a relative basis the annualised fee is still below half a percent in absolute terms.
The attached Dashboard from our Excel Toolkit shows a summary of sentiment towards European banks based on trades in the last 14 days. Screening the 316 names, investors are consistently positive (i.e.decreasing short interest and rising institutional ownership) towards 7% of them with mainly UK (BARC, HSBA, RBS), French (BNP, ACA) and Italian (UCG, UBI, BMPS) banks featuring along with one Austrian bank – Erste Group. Only 1% show up negative sentiment with two Greek names (Piraeus and EFG Eurobank) and one Swiss (Basler Ktbk).
Part of the reason so few names show up as negative sentiment is that long only funds who lend have been buying shares in some of these banks in anticipation that the price has fallen too far. Short interest is still rising in names like Banco Comercial Portugues (BCP) to 8% of the company but the gross shares in this company held in lending programs are also rising. This is classified as neutral sentiment.
The other Portuguese banks with a spike in short selling in late December are Banco BPI (BPI) to 2.5% of all shares. Looking across to Spain, the heavily shorted banks like Banco de Valencia and Banco de Sabadell show no signs of any short covering and both saw an increase is stock on loan over the last two weeks. There has been some short covering in Banco Populare (POP).
