Are Periphery Credits Cheap?

- "Sovereign risk completely dominated corporate credit in H1 10. Past crises strongly suggest it will remain the principal driver of periphery corporate credit until the uncertainty is laid to rest."
- "Sovereign crises tend to cause sharp increases in corporate default rates. The transmission mechanisms vary but some sovereign crises in EM countries have seen speculative default rates rise as high as 60%."
- "Decoupling unlikely – not all the contagion mechanisms in past EM crises would be repeated, but we believe there is plenty of uncertainty about the repercussions of a sovereign crisis in an EMU country to prevent most corporates decoupling from their sovereigns."
- "Banks are particularly susceptible – in theory and in practice. Non-financial spreads tend to be highly correlated with the sovereign, but may initially respond less than proportionately. But the deeper the crisis, the more likely that corporates will respond almost 1:1 with the sovereign."
- "Better value elsewhere – until European periphery sovereigns address solvency concerns more resolutely, we believe there is better value elsewhere than in periphery corporates."


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