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Frequent borrowers look to euros

The recent dramatic widening of euro swap spreads means that euro-denominated debt is becoming cheaper for agencies and supranationals. Could this signal the start of a fundamental shift away from dollar bonds for these issuers? Lawrence White reports.

WHEN THE EURO was introduced in January 2000, 10-year German swap spreads initially went as wide as –70 basis points before correcting; they have been simmering at around –5bp to –8bp ever since. Then, late last year, they began to widen again, reaching –23bp at the time of writing. Is this a short-term phenomenon, or the start of a fundamental shift in the cost of funding in euros?

Hans den Hoedt, global head of public sector debt at ABN Amro, sees a trend. “I think the widening of euro swap spreads is a longer-term phenomenon. They are 85% to 90% correlated to short-term ECB rates, which are on a rising trend. The other main factor affecting swap rates is the supply from sovereigns, and since most sovereigns will continue to push for lower deficits, this will make govvies richer and swap spreads therefore wider. In the short term, however, as a result of heavy swap flows in August and September, swap spreads will likely be a bit more stable and in some cases marginally tighter.”

The immediate effect of this widening of euro swap spreads is that agencies and supranational borrowers based in Europe have less financial incentive to borrow in dollars.

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