Emerging Markets Debt and the PIGS

Given the acute issues facing Ireland—with negotiations going on Wednesday about how to help Ireland and Irish banks, and Portugal under scrutiny as well now, there’s pressure to come up with a plan that will relieve some of the uncertainty. And there’s also a countdown to an important report on Nov. 30, according to High Frequency Economics Economist Dr. Carl Weinberg, about how Greece is doing in relation to monetary targets in Greece’s IMF bailout package from last May.

It should be noted that there is no debt from the PIGS is listed in the holdings by country breakdown for the fund. Padilla’s fund is an emerging markets fund and debt of European developed countries is not, of course, the focus for this fund.

With PIGS, It Is Credit Fundamentals Versus Valuations

“It is not part of my direct markets but it is something that will affect my markets,” Padilla told AdvisorOne.com in a brief interview. “Primarily I think the effect will be on the pricing of the securities in our markets, not necessarily as much on the underlying credit fundamentals.”

“With the credit fundamentals, while a debt restructuring or some sort of negative outcome in terms of the stock of debt—not just of Greece but of the Irish banks—I think that will definitely have a negative impact on spreads for fixed income products—for credit products,” Padilla explained to AdvisorOne.com. “I think there will be some sort of contagion in terms of the pricing, but whether Greece ends up restructuring, I’m not sure that’s going to create a negative drag in terms of the growth potential for some of the most important countries within EM.”

From a credit fundamental perspective, it may have a slight drag, and it all depends on how it gets worked out, but it’s not going to be significant. On the valuation side, that will be more sharply felt, however, we’ll maybe see something like we saw in the second half of ’08 where all of the credit markets get hit,” Padilla notes in the interview. “But I don’t think it’s going to be as severe, number one. Number two, I think you’re going to see a rebound of prices because, at the end of the day, if the credit fundamentals are intact the prices should recover. We’re very concerned about what’s happening there primarily from the valuation side,” not from the fundamental side.” 

See an exclusive interview at AdvisorOne.com with former U.S. Treasury Secretary Paul O’Neill and his comments on the Greek crisis just after the Greek bailout in the spring.