Euro Special - Part III
Eurospecial - the rising need for ratings
Euro will leave big footprints in the bond markets. First the question, who
and where will issue the new European benchmark, has not yet been
answered. Another very important point is that the bonds change their risk
profile in the new monetary space. The exchange rate risks as the source of
interest rate differences are of course gone. On the other hand the credit
rating risks will among others come forward. The differences in case of
government bonds should not be too big - 15 basis points can be expected at
the most. This will lead to a search for outperformers, i.e. for better-than-
government yields. The investors will concentrate on private emissions; their
variety and inventiveness will follow the example of US example. On the
other hand the demand will increase on the low-end-state side - just the same
as in the US case. It does not make sense for the regional government to
apply for a credit in a bank that has an inferior rating as the borrower itself.
The need for ratings, transparency and investor relations management will
increase. The state-level emissions will not any more automatically enjoy
triple-A rating, because so far this was possible only because of ,soft budget
restrictions". This means that national governments could use the money and
exchange rate instruments to iron over their sloppy fiscal policies and thus
always guarantee the repayments of their debts. The ,non-bail-out clause" of
Maastricht treaty stopped this practice. The community does not guarantee
the debts of the member states. Starting with the EMU all new emissions,
due later than 1.1.2002, will be issued in Euro.
Eurospecial - main beneficiary are the stock markets
The bond market, however, will not be, compared to the stock market,
relatively unattractive to an investor, looking for diversification, in view of
the fact that risk profiles are converging. A study by the Centre for European
economy research (EZW) shows that EMU will lead to increased
proportion of equities and a corresponding decrease in bonds in the
international investors' portfolios. Specially the markets of EMU-participants
will profit from the expected international capital inflows. The diversification
in the European markets will, however, not follow - as in the past - the state
frontiers; it will much more take into account the branches. For instance the
difference between DAX and CAC40 will matter less and the relative
performance of (for instance) the car industry and insurance indeces will
matter more for the simple reason, that the business cycle differences will
have more impact than the differences between the participant state's
economies. Eventually one can expect EMU to influence equity markets less
than it will the bond markets. The heterogeneity of stock markets will
remain.
The technical switch-over is a different questions. All the German stock
exchanges will start to operate in Euro on 4th January 1999. during the
transition period extending to 1.1.2002 the dividends can be paid both in DM
or in Euro. The minimum capital required is 50.000 Euro, and a single
denomination one Euro or its multiple. The reevaluation of the stock value
can happen three ways: capital stock-up from the company funds, a re-
distribution of common stock or capital decrease. Capital stock-up means in
this case no new inflows, because the free assets are converted into the
common stock (passive exchange). This will be allowed by the laws, that will
be enacted to regulate the Euro introduction. This step can then be followed
by a stock split , for instance into 1-Euro-stock denominations. On top of that
it is possible in Germany since 1.4. this year to issue stock without
denomination. The only condition is that the basic unit of common stock
corresponds nominally to "one Euro". This kind of a switch-over does not
influence the market value of the company. It also means that both the stock
price and derivatives, if any, do not need to adjust.
...end of part III |
