Cowen’s Sean Pignatell On Why Peripheral Sovereign Debt Is ‘Completely Uninvestable’
This may be in Germany’s future.
Sean Pignatell of Cowen International just put out a new note calling peripheral European debt “completely uninvestable” and predicting the end of the eurozone unless the European Central Bank makes a commitment to “unconditional and unlimited” intervention in the sovereign bond market.
That’s because it is now impossible to hedge both currency and sovereign credit risk.
A combination of policy that allowed Greece to default (even “selectively”) and bond yields surpassing 3% mean that investors are no longer able to hedge the sovereign credit risk of the PIIGS. Even France, Pignatell writes, is nearing the end of that rope.
But now it’s even impossible to hedge currency risk. Here’s why:
The real answer is that it never could be but, until very recently, it didn’t need to be. And here we have to go back to that pivotal moment when Merkel and Sarkozy openly called Papandreou’s bluff and turned his ill-advised political manoeuvre (the bail-out referendum) into a vote on remaining in the Eurozone. One bad decision compounded by a catastrophic one. Pandora’s Box was opened and there will be no coming back from that one.
So, in one move we went from a position whereby currency risk for individual countries in the Eurozone could be hedged via Euros, to needing to be hedged in currencies that, as yet, do not exist.
With the very fabric of the euro monetary union in flux, there is only one solution that would avoid catastrophe:
Markets will continue to be volatile, and Eurozone sovereign spreads will have good days as well as bad. However, until the ECB fully commits, both unconditionally and without limit, then these bond spreads will continue to rise.
The mechanism by which others get sucked into the periphery is not dissimilar to a black hole; as the periphery’s problems grow, so does its pulling power, drawing more countries into its vortex, in turn increasing its force. Eventually, without a break up of the Eurozone, even Germany would get sucked in.