In collaboration with Global Pensions, Data Explorers Consulting brings you the latest in global trends and analysis on securities lending. Ed Oliver explains how the Greece crisis has turned a spotlight on the shortselling of government bonds
A topic that has hit the headlines during the last few weeks has been the sovereign debt crisis affecting Greece and the potential implications for some of the other European Union markets such as Spain, Italy, Ireland and Portugal.
This has led to claims that some hedge funds have benefited from shorting government bonds and requests to introduce restrictions on doing so. We have been here before of course – the furore around, in particular, financial securities in late 2008 led to short selling restrictions to be imposed by regulators around the globe.
The headlines around short selling always create some nervousness for pension funds with securities lending programmes as securities lending tends to be drawn into the short selling discussions – in order to sell something you don’t own you need to borrow it.
However the recent stories did raise the question about short selling of governments – was this the case?
The following chart shows the current and historic short positions1 for a range of smaller and developing countries, averaged across the bonds issued by each government. Bonds are widely used in repo financing, where an investor buys a security with an agreement that the seller will buy it back on a certain date, so we have removed all cash collateral trades from this dataset. We have also excluded bonds for the main markets because they can feature on both sides of a repo transaction – as loan or collateral. The bonds shown here do not tend to feature in collateral sets so the loan position is likely to reflect genuine directional short selling.
This shows that Romania was the top short last year. This is still the case but utilisation has dropped back substantially. Ukraine and Bulgaria have also seen substantial falls in utilisation.
Slovenia and Lithuania are next, with Lithuania showing a particularly large year-on-year change. Poland, Slovakia and Hungary also show major negative sentiment with Hungary having risen sharply over the year.
The peripheral EU developed markets of Ireland, Portugal and Greece come next – all countries which have been discussed recently in the press as potentially vulnerable.
Abu Dhabi has shot up from almost zero a year ago, reflecting market concerns about the true cost of its effective bailout of Dubai. The Czech Republic also shows a large proportionate increase.
Some market discussion and sell side research has investigated the linkages between these countries – for example, the Greek banks are said to have lent heavily to Romania and Bulgaria; most of the Eastern European countries have focused their borrowing in Austria.
Patterns like these will determine whether isolated defaults become falling dominoes. Some of these countries may come under the protective mantle of the EU or the International Monetary Fund and as a result the short selling may be unjustified; but this in turn focuses attention on the fiscal strength of all the member states.
It is worth noting that the utilizations are nothing large (the average utilization of bonds in the Data Explorers database is 20%) as a heavily shorted equity will see utilizations of near 100%. It is clear that these utilisations are not close to that level so the data does not suggest that shorting of governments is rife. This is reassuring news for pension fund trustees who are concerned that they may be witnessing another awkward securities lending moment.
[asset_library_tag 1009,Click here to download the yearly change in average utilisation case study]
Ed Oliver is a director at Data Explorers Consulting; www.dataexplorers.com
1Of the bonds that are made available to cover short selling, the short position is measured by the proportion that is actually borrowed. This measure (“Utilization”) ranges from 0% - 100%.
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