Sovereign Crisis Not Good for U.S. Spreads
October 12, 2011
The unwind of Franco-Belgian banking group Dexia could result in over $100 billion of ABS and MBS sales, market analysts said.
Moody’s Investors Service last week placed Dexia’s three main operating units on review for a downgrade on the back of concerns that the lender was struggling to fund itself. Moody's is also concerned that the bank does not have sufficient collateral at its disposal, “potentially resulting in a further squeeze in its available liquidity reserves.” The bank’s shares are down 59 percent this year.
The potential for ABS/MBS sales resulting from the unwind would be bad for U.S. securitization spreads. "If their are any more Dexias that will mean further, albeit non-forced, selling pressure," said Adam Murphy, President of Empirasign Strategies. " What's French for Maiden Lane? Funny enough, it's the same in either language."
According to Jesse Litvak, managing director at Jefferies, Europe's problems are far from over. "Europe is still a mess," said Litvak in an e-mail comment. "In case you missed it overnite, the long end Bund auction didn't even clear. Dexia recently was nationalized and there is just no way humanly possible that the end-game is near on Europe."
As for how the newly announced details around the Volker rule might affect spreads, Murphy said that the rule is already priced in. "The only effect it may have is as a retardant on future spread tightening," he explained. "In the past, it was very easy for a bank to quickly deploy new capital to buy spread product on a prop desk, but it's a considerably longer process for a hedge fund to go raise money to enact a new strategy."