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Local regulation in global markets?

- "The last couple of weeks brought about some breathtaking developments. Who would have imagined a few months ago that center-left governments in Greece, Spain and Portugal would come up with draconian fiscal belt-tightening, while a center-right government in Germany implemented drastic regulatory tightening? Both factors have (potentially negative) implications for credit markets. However, while the deleveraging of sovereign balance sheets seems to be inevitable, an improved regulatory framework should address the formation of a bubble rather than preventing tools to hedge against a bubble."
Macro Outlook: "Financial markets play an essential role in the economy as intermediaries. However, asymmetric information, moral hazard and adverse selection make regulatory intervention indispensable for efficient functioning."
Micro Fundamentals: "Regulation has managed to become the main concern of investors due to poor political response to the capital markets shake-up in May. Tighter credit conditions could be one implication that negatively affects borrowers."
Debt-Equity-Linkage: "The new regulation measures will potentially impact the link
between debt and equity financial instruments, not only reducing liquidity in these markets but also disturbing the relative pricing of debt and equity instruments."
Credit Quality Trend: "Increasing the credit quality of banks is the ultimate goal of regulators to improve systemic stability. The easiest way would be to increase bank capital, but this has negative implications for the economy, as it would increase the cost of credit."
Market Technicals: "The sovereign debt crisis impacts primary markets. With the risk of a substantial repricing of credits in the cards, investors are not ready to add credit exposure."
Valuation & Timing: "Markets will behave less jumpy but spread widening pressure will persist."
Other Credit Markets: Credit Derivatives: "The actual usefulness of the German short-selling ban on CDS remains a mystery. EEMEA Credits: Accelerating inflation, surging housing prices and economic growth reaching almost 12% have increased pressure on Chinese authorities to undertake steps preventing a hard landing, with potentially negative implications for EEMEA credits. Regulation overkill in securitization illustrated by two new rules, i.e., CESR money market regulation, US-SEC Rule 17g-5."
Allocation: "Having missed the opportunity to cut our exposure to the more cyclical basic resources sector on time, we are also reluctant to implement this reversal during a panic phase. Nevertheless, amid mounting evidence of slower economic activity in China, we plan to reduce our exposure in the next few weeks. The rest of the portfolio remains unchanged as it already reflects our defensive stance."
Model Portfolio: "Our financials portfolio underperformed the benchmark by -67bp, while the non-financials portfolio underperformed by -32bp due to our exposure to basic resources."
Unicredit Euro Credit Pilot June2010

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