Greece

The impact of the ECB’s second purchase programme could be lessened considerably by renewed volatility in the markets. Equity and fixed income indices plummeted on Tuesday morning, wiping out at a stroke the positive reaction seen at the end of last week to the European summit meetings that had attempted to inject some confidence back into markets.

A major covered bond investor talks to The Cover about the ECB’s purchase programme and what could follow. He does not think it will adopt a needs-based approach and suspects that a prospective spread tightening will be short-lived.

The concept of liquidity has changed over the course of the financial crisis. Where once it may have been viewed as a free ticket, it is now highly valued — for without liquidity there cannot be a market. Covered bonds are comfortably at the most liquid end of the credit spectrum, but the way they are traded has completely changed since the onset of the financial crisis.

Moody’s has cut its rating of covered bonds issued by EFG Eurobank Ergasias from Ba3 to B1, on review for downgrade, although the bonds remain eligible for repo with the ECB as they are still rated BBB- by Fitch.

ssuers will need to pick their timing carefully this week given German holidays on Monday, along with an Ecofin meeting in Luxembourg, a decision on another round of covered bond buying to be taken at Thursday’s ECB policy meeting and US non-farm payrolls on Friday.

German, French and UK issuers launched trades on Tuesday as indices tightened and stock markets rose on hopes that a solution to the eurozone debt crisis had been outlined over the weekend.

European bond markets reacted poorly to the no-committal anodyne ECOFIN meeting in Poland and the Berlin election result over the week end with the Bund yield predictably gapping lower on Monday. Credit markets followed suit with the iTraxx Senior Financials ending +24bp at 286bp and the SovX W Europe finishing +13bp at 338bp. But the moves lacked conviction and the jury is out as to whether the primary market will remain closed.

Markets opened poorly on Monday morning and hit record wides in some indices, after concerns about Greece’s ability to meet its austerity commitments dominated weekend headlines. Syndicate bankers touted Tuesday as the day to bring a deal if market conditions were constructive, but the volatility means they expect no primary supply this week.

A UK based covered bond investor spoke to The Cover about the sovereign crisis. He believes the primary market should still be able to function, though the group of issuers capable of doing a deal will be much smaller. Greece is beyond hope, but he says the rest of Europe can still be saved.

A theoretical 10% or 20% haircut on ECB exchanged Greek government bonds in the public sector cover pools of German banks would have a limited effect on nominal overcollaterlisation (OC). Spanish and Italian pool exposures are much larger and a factor that investors should take into consideration.

Moody’s cut the residential mortgage backed covered bonds of two Cypriot issuers to the border of sub investment grade on Thursday, following a downgrade of Cyprus and the respective bond issuers.

Four Greek covered bonds on the brink of junk status will remain on rating watch negative, though structural adjustments have strengthened the programmes. Fitch maintained mortgage covered bonds issued by Alpha Bank, Eurobank EFG, National Bank of Greece (NBG) Programme II and Piraeus Bank on rating watch negative on Friday.