Heading Towards Default, an Update on the Commercial Real Estate Outlook...
COVERAGE OF DEVELOPMENTS IN THE EUROZONE AND
ITS IMPLICATIONS FOR US CRE DEBT MARKET CONDITIONS AND FINANCING COSTS
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SEPTEMBER 11 2012 — Sam Chandan speaks with CNBC's Lisa Oake before the September monetary policy meeting in the United States.
Watch the video above or at the CNBC website.
JULY 9 2012 — Hoping to stimulate borrowing and investment in relatively low-risk assets, the European Central Bank (ECB) cut its benchmark refinancing rate to 0.75 percent at its July 5 monetary policy meeting. Deposit rates were also cut by 25 basis points, to zero percent; the marginal lending facility was cut to 1.50 percent. In addition to temporary closures of several European money market funds and a slide in the Euro, the reaction to the latest policy move has been largely counterproductive. Reversing the small improvement that followed the late-June Brussels summit, yields on Spanish debt have again climbed above 7 percent. In contrast, the two-year German bund yield has fallen below zero percent for the first time on record.
Speaking to the bluntness of interest rate policy, International Monetary Fund (IMF) Managing Director Christine Lagarde went on record last week questioning whether it was the most appropriate of the ECB's current options. As evidenced by Spain, the rate cuts are not easing pressures on the most indebted economies. German yields could fall even lower as the Federal Constitutional Court prepares for July 10 hearings on the legality of the European Stability Mechanism (ESM). A ruling against Germany's participation - in the form of a temporary injection - could effectively undo the centerpiece of the Eurozone's rescue plan, pushing financial markets back into a state of immediate crisis. In Brussels today, finance ministers are moving forward nonetheless on a framework for a single banking authority reporting to the ECB.
As the following chart shows, 10-year sovereign bond yields are closely related to current growth projections. The size of each bubble reflects the Economist's projections for 2012 deficits. Greece has been omitted to preserve scale but would otherwise appear in the extreme top-left of the chart, reflecting yields in excess of 25 percent and a 2012 GDP contraction of approximately 7 percent.
JULY 3 2012 — In a statement released at the conclusion of the Brussels summit, Euro Area leaders announced an agreement in principle that will allow rescue funds to be deployed in the recapitalization of the banking sector. Since the supervisory controls over the European Stability Mechanism (ESM) will not be in place until early 2013 at the earliest, the European Financial Stability Fund (EFSF) will provide necessary financial support in the interim.
The agreement is not the breakthrough it seems at first, since it remains unclear if individual countries will have to guarantee the loans made by the ESM to their banks. Sovereign guarantees will blunt the impact of European support in narrowing government borrowing costs, leaving one of the major threats to European stability unresolved. Spain and the peripheral economies have seen little relief in borrowing costs. Spreads over German bunds remain historically wide. Bunds and Treasuries indicate no let-up in perceptions of risk, limiting upward pressure on cap rates and financing costs for core properties.
Read the Brussels summit press release.
JUNE 25 2012 11:00 British • 06:00 Eastern — Compromise and Conflict Ahead of This Week's Summit — Pressed to support Eurozone partners as well as Germany’s sixteen state governments, Chancellor Angela Merkel has offered a key concession to the latter group, agreeing to joint debt sales beginning next year and one-time and recurring transfers. Chancellor Merkel is compromising at home, in part because she needs the support of opposition Social Democrats in the Bundestag if Germany is to pass the European Fiscal Compact in the coming weeks.
European leaders will meet beginning this Thursday in Brussels and are expected to grapple with differences over stimulus measures. The anchor economies remain at odds over how to proceed, with Germany appearing increasingly isolated in its resistance to more flexible crisis-response measures. If France and Italy do not persuade Germany, the perceived failure of the summit may trigger a new wave of volatility in financial markets.
Also This Morning:
- The Bank for International Settlements released its annual report yesterday, saying “the economic momentum in advanced economies was too weak [in 2011 and 2012 YTD] to generate a robust, self-sustaining recovery.” The report also raises concerns about the credibility and effectiveness of advanced economies’ central banks.
- Spain formalized its bailout request this morning, according to a statement by is finance ministry.
- Bond yields are rising in Spain and Italy as investors retreat to the safe haven of German bunds. The ten-year bund is currently trading at a yield of just over 1.5 percent.
JUNE 17 2012 — Initial Results of Greek Election — Europe has stayed its most immediate existential threat as parties committed to the Hellenic bailout carried Greece’s second election in as many months. Based on preliminary counts released Sunday by the Greek interior ministry, the New Democracy party eked out a slim plurality of votes for the Parliament of the Hellenes. With the support of the smaller PASOK party, a new government is expected to push forward with austerity measures agreed in exchange for €240 billion ($303 billion) in financial support since May 2010.
The initial response to the results has conveyed a sense of relief, at least outside of Greece, which should be echoed in easing measures of systemic financial stress in Europe and the United States. Leading up to the weekend, policymakers had been positioning to brace financial markets against a potential Greek exit from the Eurozone. While the imminent danger of financial market seizure may have receded, the fundamental issues that imperil stability across the Continent remain unresolved.
In a speech given last Thursday at the Lord Mayor’s home in London, Bank of England Governor Sir Mervyn King said the impact of the “Euro Area crisis has been to create a large black cloud of uncertainty hanging over not only the euro area but our economy too, and indeed the world economy as a whole.” That characterization of the crisis held water going into the Greek vote and it remains true in the vote’s aftermath. Absent a European program of debt mutualization that will reduce the cost of sovereign finance – such as might be the case under the terms of a Hamiltonian redemption fund – resolution of the crisis will remain elusive. Net capital flows will remain weighted to low-risk US assets, containing increases in Treasury yields, while volatility in required returns from risky assets will persist as headwinds for CMBS issuance — Sam Chandan
JUNE 14 2012 — Italian Financing Costs Rise Heading into Greek Election — Pointing to spillovers from Spain, yields on one-year Italian government bonds increased to 3.97 percent at auction yesterday. Italy's short-term financing costs have doubled from a month earlier and are four times their 2012 low. The results of today's three-year bond auction suggested no relief as yields on the longer-dated bonds increased to 5.30 percent, up 1.4 percent from mid-May. This weekend's election in Greece will be pivotal for sovereign borrowing costs. If Greece's position within the Eurozone becomes tenuous, yields will rise across Europe and should decline further for US Treasuries. Capital continues to flow into the US. The ten-year Treasury closed at 1.60 percent today, up by just 13 basis points from a historic low of 1.47 percent on June 1 — Ryan Morrell
JUNE 13 2012 — CNBC INTERVIEW WITH SAM CHANDAN — In this interview with CNBC's Martin Soong, Sam Chandan discusses the implications of a worsening Eurozone crisis for global financial stability and the bond markets.
Watch the video here or at the CNBC website: cnbc.com
JUNE 12 2012 — Spain's Bailout Request — In a concession to the Continent's increasingly unmanageable state of crisis, Spain last weekend announced that it would seek €100 billion ($125 billion) in financing through the European Financial Stabilization Mechanism and the anticipated permanent rescue fund. Faced with the prospect of dissolution should Spain's banking woes overtake its remaining islands of stability, the European Union signaled a robust 11th-hour response. In a Saturday press release, the Eurogroup offered that "the loan will be scaled to provide an effective backstop covering for all possible capital requirements ..." In the extreme, our current stress tests of commercial mortgage performance are characterized by further globalization of the fiscal crisis. A new historic low in Treasury yields will be more than offset by a dramatic tightening of credit — Sam Chandan