Edward Harrison is the founder of the blog Credit Writedowns and is a finance specialist at Global Macro Advisors. Previously, Edward was a strategy and finance executive at Deutsche Bank, Bain, and Yahoo. He started his career as a diplomat and speaks German, Dutch, Swedish, Spanish and French. Edward holds an MBA from Columbia University and a BA in Economics from Dartmouth College.
On Thursday, Banca Monte dei Paschi di Siena’s subordinated debt offering received orders for more than three times the 750 million-euro debentures it was offering on Thursday. Meanwhile, on Friday, the euro climbed to a three-year high on the back of a German government Grand Coalition deal. These events highlight the confidence European investors have as 2018 begins.
When 2016 ended, the EU had just survived a very difficult year, marked by the British exit referendum, speculation about the solvency of Germany’s biggest bank, Deutsche Bank, and the bailout of Italy’s oldest bank, Monte dei Paschi. But in 2017, the European economy had a real breakout, with the EU expected to grow 2.2%, the highest growth in a decade. Growth may have been faster in the EU than in the US. Meanwhile, unemployment, while still high, is at a 9-year low.
Monte dei Paschi’s debt offering symbolizes the euphoria because it is a subordinated debt deal, meaning investors will not have first-right claims on the bank’s assets if anything goes wrong. Yet this deal was three times oversubscribed.
However, this morning the big news was the formation of another Grand Coalition government of the CDU, CSU and SPD. After weeks of wondering whether Germany would be forced to call another election, there was great relief. And the euro climbed to its highest level since late 2014 on the back of the news.
My take: Because of the synchronized global boom, investors are now fully cognizant that the US central bank will be joined by other major central banks in dialling back stimulus. The Euro has risen because of this. At the same time, yields in Europe are still low, with the ECB keeping the base rate negative. Greece’s 2-year bond yield is higher than the rate in the US, for example. So investors are forced to reach for yield and this has buoyed issues like Monte dei Paschi. For now, it’s good times.