European periphery: think relative

- "At a time when economic data in the euro area has been surprising on the positive side, negative headlines in the European periphery last week pushed spreads to Bunds above the pre-stability package highs in early May. Despite a subsequent recovery, the scale of accumulated potential losses on peripheral assets remains highly sensitive given the central role played by banks in particular in the supply absorption process. While most of the focus in this respect is on domestic banking sectors, the latest BIS statistics on foreign claims add another piece to the jigsaw in assessing the overall burden. It reveals evidence of cross-border sharing of losses, making the digestion process more manageable. In this article, we take a deeper look at the BIS data in an attempt to quantify the extent of this dynamic. On the whole, we believe it adds to the contention that pessimism regarding the periphery is overdone even though there is still a long way to go in the remedial process."

Nomura Macro Insights 20100917

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