Lean times for corporate bond markets

Investor concerns over company profits have negatively affected the corporate bond markets in the eurozone and the USA, according to the Euro Area Monthly, a publication of the Strategic Planning and Research Department of the National Bank of Greece. Referring to «the tremendous uncertainty in the business environment over profit prospects» which affects stock markets negatively, the publication observes that these developments «have also lowered corporates’ net worth.» This has increased the cost of capital because financing premiums for loans and bond have risen. «In addition,» says Euro Area Monthly «recent accounting scandals in the USA have resulted in outflows from corporate bonds to safe haven instruments like government paper, pushing up corporate yields even further. Indeed, the spread of 10-year BBB corporates is approximately 200 basis points (2 percent) over comparable government securities.» The state of the corporate bond market comes as a reminder of the perils of over reliance on that market at a moment when the government intends precisely to strengthen that segment by giving Greek corporations the ability to securitize property assets. This is a long-overdue reform but experts have expressed doubts about its ability to work in the present environment, as most large Greek corporations are relying on foreign corporate markets to get their financing, meaning that the local market would be dominated by small and medium-sized enterprises. Although these, too, need financing, there are many unresolved questions about the real state of their finances which make the success of their bonds quite doubtful. Still, experts insist, the domestic corporate bond market must be allowed to expand. The eurozone will grow by a meager 0.9 percent this year, the Euro Area Monthly says, revising downward its previous estimate of 1.2 percent. A large part of the growth slowdown is due to «the rigidities in euro area labor markets, which are slowing the pace at which companies restructure,» the report says. Although Greek economic growth is expected to be robust this year (3.8 percent, the highest among industrialized countries), the labor market rigidities that plague the eurozone exist here as well, and are in certain cases more prominent. But domestic growth is spurred by the explosion in construction activity related to the 2004 Athens Olympics and the funds available through the EU’s Third Community Support Framework.