Robeco: IMF: Greece’s public debt highly unsustainable

Main market events

The main theme for this week are the increasing political risks, as a result of the upcoming elections in France and the Netherlands. Peripheral spreads widened due to the risks of a Le Pen victory and the repercussion for the future of the Eurozone. Especially Italy experienced a volatile week, as spreads increased above 200bp for the first time since 2014. After a brief rally in spreads, the Italian 10-year bond is trading close but below the 200bp mark. 

Italian bonds have returned -2.28% this year, Spanish bonds -1.44%, Portuguese bonds -1.19% and Irish bonds -1.70%.

Greece

Furthermore, the IMF stated that Greece requires a significant debt relief from its European partners. In this context, German finance minister Schaeuble ruled out a debt cut, and stated that Greece should step out of the euro to get a debt cut. This July Greece needs to repay more than EUR 6bn, which looks rather difficult.

Italy

Chances for early elections decreased this week, as the constitutional court indicated that the electoral laws for the lower and upper house need to be brought inline. Currently the lower house still has a bonus system for the political party that gets more than 40% of the votes, whereas the senate has a pure proportional system. Changing the electoral law takes time, therefore the chances for elections in June have decreased.

Portugal

The OECD advised Portugal to address the financial fragility, given the large stock of non-performing loans in the banking sector. The fragile banking sector hampers economic growth, as much needed investments are curtailed.

Robeco Euro Government Bonds

We took profit on the underweight position in Italy this week, as spreads had widened significantly. Our fundamental view on Italy remains bearish as Italy needs reforms to increase growth. Stronger growth is necessary to improve the sustainability of the public debt, to reduce banks’ NPLs and to reduce unemployment and hence political risks. Rising yield levels are also unfavorable given Italy’s large public debt. 

We maintain our overweight position in Ireland. Irish bond spreads are attractive given the improved Irish fundamentals and its strong ESG scores. Currently the fund is 38% invested in peripheral bonds, versus 39% in the benchmark. Year-to-date the fund’s absolute return is -1.30%*.

* Robeco Euro Government Bonds, gross of fees, based on Net Asset Value, YTD February 9, 2017. The value of your investments may fluctuate. Past results are no guarantee of future performance.