Why the Eurozone Sovereign Crisis is a Bad Thing for Infrastructure Investors

By Peter Allison

To say that fear stalked European financial markets during August is something of an understatement. While temperatures rose in Greece, Italy and Spain, markets headed in the opposite direction.

The underlying theme was volatility.

The swing in yields on ten-year Spanish and Italian government treasuries was an eye-watering 1% during one week in August. Equities dropped in value and then recovered slightly. Then they fell again. The price of gold climbed to record highs and then dropped as it got sold off.

Markets hate volatility. It isn't especially good for infrastructure investing either. And in the absence of effective leadership from Europe's politicians who can't decide how to deal with their continent's worsening sovereign debt crisis, it looks like sticking around for a while longer.

That means the infrastructure market is in for a bumpy ride in the next quarter, or until there is some resolution of the crisis in the Eurozone.

European financial markets that swing back and forth are bad for infrastructure investing for three main reasons.

Refinancing Worries
Firstly, market volatility has the potential to throw some capital markets refinancings off course, or to increase the cost of borrowing for issuers. UK train leasing company Porterbrook notched wider credit spreads than it would have liked over a year ago when the Eurozone sovereign crisis first surfaced. Vinci pulled a planned Eurobond refinancing of its Autoroutes du Sud de la France (ASF) asset in July following a downgrade of Portugal by Moody's.

It is therefore by no means certain that planned refinancings like Arqiva, Eiffarie, HS1 and Peel Ports will have a smooth passage.

In a piece published before the August holiday break, InfraNews concluded that infrastructure's refinancing wall hadn't proved the insurmountable obstacle first anticipated. But conditions in credit markets have clearly changed since then. It might only be a few bricks, but that wall just got higher.

Signs of another problem for credit markets also emerged in August when an unnamed European bank requested a credit line from the European Central Bank (ECB). That suggests European inter-bank lending could be freezing up again. When it eventually occurs, a Greek sovereign default will mean that those European banks with exposure to Greek government treasuries will need to write-down the value of their assets causing a potentially deeper freeze of Europe's credit markets.

This time, even high-grade infrastructure credits might not be immune from frozen credit markets as they proved after the collapse of Lehman Brothers in 2008.

To read the full article, click here: http://www.infra-news.com/analysis/opinion/900598/opinion-why-the-eurozone-sovereign-crisis-is-a-bad-thing-for-infrastructure-investors.thtml

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