- Countries suffered to varying degrees during the economic downturn, and the differences in recovery have been even more striking.
- The uneven nature of economic recovery was evident in recent Russian and Greek US-dollar bond issues.
- Russia was able to sell bonds at record low rates, while Greece hasn't drummed up much interest.
- Though small pockets of the world might be mired in a winter of despair, investors globally are enjoying a spring of hope.
Recessions and recoveries often effect an economic winnowing of sorts—the wheat being separated from the chaff. This has certainly been true over the past two years or so. Countries suffered to varying degrees during the downturn, and the differences in recovery have been even more striking. Overall, the global economy is bouncing back nicely. The International Monetary Fund (IMF) recently upped its forecast for global economic growth in 2010 to 4.2%—the fastest pace since 2007. Emerging Markets are mostly leading the upturn, dragging their developed counterparts along with them—some more reluctantly than others. But a few small nations aren't recovering at all and instead continue sinking—it's the best of times for most, the worst of times for some.
The uneven nature of economic recovery has been evident in capital markets as some soar while others flounder. The disparity was clearly illustrated by two recent bond issues. Both Russia and Greece sought to raise money through similarly sized US dollar-denominated bond offerings in the past few weeks, but with strikingly different results.
Greece had hoped to sell as much as $10 billion in US dollar bonds, primarily to investors in Asia and the US. But the deal hasn't received much interest as Greece's continued financial woes keep investors away. Greece has already cut the size of the deal dramatically (from the $5 billion-$10 billion range to the $1 billion-$4 billion range). Considering new Eurostat revelations about Greece's deficit, the continued rise in Greek bond yields (two-year Greek yields are now over 10%), and a formal request to tap the €45 billion EU/IMF aid package, it's likely the bond offering will be canceled altogether. Some fear Greece will ultimately default even with the aid package currently in place as funding problems re-emerge in 2011 and beyond. (We think that unlikely, but still, the fear is out there.)
In contrast to Greece, Russia recently sold its first dollar-denominated bond since 1998—the year of the Russian ruble crisis and debt default. (Incidentally, despite the Russian default and the failure of hedge fund Long-Term Capital Management, stocks soared in 1998 with the S&P 500 and MSCI World up 28.6% and 24.8%, respectively.) Look how far Russia has come in the last 12 or so years.
Russia managed to sell bonds totaling $5.5 billion—$2 billion of 5-year bonds were issued with a 3.74% yield (a mere 1.25% above comparable US Treasuries), and $3.5 billion of 10-year bonds were issued with a 5.08% yield (1.35% over Treasuries). Both were record low yields for Russian debt. Not to mention the fact Russia sold only about half the planned $10 billion, not due to lack of demand but because a strong global economy is boosting oil prices and reducing Russia's need for cash.
As we've said many times, Greece's problem are Greece's problems and don't reflect the state of the world. Capital markets are telling us as much. Most sovereign bond yields are near historic lows, many countries have been upgraded recently (not that debt ratings tell investors much—S&P currently rates Russian foreign currency bonds lower than Greece's), the volume of corporate bond offerings is surging, and global stocks continue charging higher. Though small pockets of the world might be mired in a winter of despair, investors globally are enjoying a spring of hope.