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CommentGC View

CEEMEA needs to nuture the euro market this year

The wave of CEEMEA sovereigns tapping the euro market before the volatility of this week was hailed by most as a temporary aberration from the norm. But issuers with large funding needs should take this opportunity to start nurturing this market more carefully and become regular issuers in both dollars and euros in the same way that the more sophisticated western SSA issuers operate.

While the safety of diversifying to another funding source is an added bonus, it is the potential effect on price of being present in two markets that should be most alluring to the CEEMEA sovereigns, which have a reputation of being aggressive with regards to bond costs.

As of last Friday, 58% of all CEEMEA issuance for the year so far was in euros. Across the whole of 2013, that proportion was 20%. Some EM accounts do not have a mandate to invest in euros and this year those accounts, frustrated by the lack of dollar supply in the primary market, picked paper up in the secondary market, leading to slow rally across the region before the sell off in EM started last Thursday.

The extra support in the secondary market could come in handy over the next few years as rising rates hit yield curves, as evidenced in extremis this week. EM bankers have long pointed to growth and reforms in the countries they cover as a tonic for rising rates, and diversifying into another currency could have a similar effect.

Because of the depth of the dollar market, issuers’ familiarity with those investors and the commodity-based economies of many countries in CEEMEA, that currency is likely to remain the main funding tool of the emerging markets for the foreseeable future.

If the basis swap moves back in favour of dollars, CEEMEA issuers may uniformly return to that currency. But some would be wrong to do so blindly looking at just the relative spreads the currencies offer on the day. Using euros regularly to take the pressure off dollar curves may have much more value.

The funding programmes and needs of some of the CEEMEA sovereigns are not hugely dissimilar to some of the smaller SSA issuers, and their ratings and the esteem in which they are held by investors is much closer to SSAs than ever before. From an investor point of view the demand for yield and diversity — two features of the EM market — was demonstrated by the €40bn book for the €10bn Spain deal last week. It is larger than most realized.

The good appetite in euros does not yet extend to all CEEMEA sovereigns. But those that it does should be looking to take advantage of it for longer than this month.

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