Concerns over the impact of Spain’s downgrade in late April on the fragile financial recovery are spreading into trade finance markets.
Although the country’s sovereign long-term debt downgrade by Standard & Poor’s (S&P) is unlikely to have a direct impact on trade finance markets, one trade finance banker remarked to GTR that it could damage newly-restored confidence and once again tighten up liquidity.
“Consequently, another ‘credit event’ could be very damaging to the recovery in activity, currently underway,” he suggests.
Over the past few months banks have been slowly rebuilding their trade finance portfolios, liquidity has returned and margins have been on a downward trend. There have been an increasing number of syndicated loans in the market, and some have been oversubscribed.
But with the mounting debt problems in Greece now affecting the economies of Spain and Portugal, there are concerns that margins globally will be pushed up, making it harder for banks wanting to book new assets.
There are further worries that this contagion from the developed countries may spread into the emerging markets, a trend that could derail the private insurance market for trade finance.
The insurance market is relatively healthy at present, despite having paid out a large number of claims last year, but in the event of a potential emerging market sovereign default, insurers may well reassess their capacity.
However, James Cunningham from the insurance broker Marsh tempers fears, telling GTR: “At this stage, the insurance market is in a wait-and-see position – things are moving by the day if not by the hour at the moment so it’s too early to make a very clear judgement call on it.”
“We are looking ahead to see that if there were some contagion or impact on emerging markets sovereign environment, whether that has an impact on the private insurance market.”
Cunningham explains that at present, there is plenty of capacity for trade finance. “The insurance market is keen and willing to underwrite trade finance deals. But if you are looking slightly ahead, and certainly if there was some form of emerging market sovereign default scenario or crisis, then that would be concerning for risk appetite.”
“In terms of projections about where the private market is in terms of non-payment cover of trade finance, broadly speaking I see lower volumes of deals, lower margins and plenty of capacity. Basically, I see supply exceeding demand in 2010. There will be a nice amount of capacity and it will be quite cheaply priced.
“But in terms of what could upset that balance is if there were sovereign problems in emerging markets.”
Ratings agency Standard & Poor’s downgraded Spain’s long-term sovereign debt by one notch from AA plus to AA. The downgrade reveals that Spain was not immune from the contagion from Greece’s deteriorating economy and burgeoning debt. Both Greece and Portugal have also been downgraded by S&P. Greek bonds were downgraded to junk status. All the downgrades caused havoc in the bond and stock markets, and left investors wondering which European country could be next.
The economic contagion factor in the Eurozone has even been likened to the ebola virus by OECD head, Angel Gurria. “When you realise you have it, you have to cut your leg off to survive,” she told Bloomberg.
According to Raj Badiani, analyst at IHS Global Insight, there is a possibility of a further downgrade if Spain’s fiscal position fails to improve steadily.
“A clear warning signal is that the official growth forecasts that accompanied the latest austerity plan are not credible, and suggest that the government may need to tighten its policies more aggressively,” he argues.
“If the economy struggles to deliver the projected growth targets, then deeper spending cuts or steeper tax rises will be required. The current austerity plan assumes that a large chunk of the deficit reduction required by 2013 will arise from a cyclical return to economic growth and the withdrawal of temporary fiscal stimulus measures.”
Spain’s economy remained in recession in the fourth quarter of 2009, and the country is still struggling with 20% unemployment.
Badiani comments that Spain will need to place a greater reliance on exports to drive the economy forward in the medium term.
“This could prove problematic,” he remarks. “Given that the price competitiveness of Spanish exports has fallen due to an inflation differential with its main trading partners. Spain’s export portfolio covers a wide range of products, but still relies too heavily on automotive exports,” he notes.
Furthermore, he argues that Spanish exporters need to become better established in rapid-growth markets such as Asia and Eastern Europe.