2011-11-21 – Edinburgh
The last two months have seen large movements in global equity and debt markets, increasing general market volatility to very high levels.
Some market observers could argue that the impending regulatory changes which will affect the investment decisions of European insurance companies and pensions providers have adversely affected the demand for European government debt.
The insurance and pensions sectors in Europe have traditionally held very large holdings of European government debt, yet new capital allocation requirements and regulatory changes might have triggered a reluctance in these sectors to continue buying such debt, exactly at a time when European governments are eager to refinance their existing debt. This in turn has exacerbated the situation by reducing the market value of existing holdings of such securities, reinforcing the downward trend in the market value of such instruments.
The regulatory changes might be partly to blame for the large and sudden reduction in demand for (what has been perceived until now) relatively safe government securities. The new regulations are still based on discredited investment theories which depend on the existence of liquid markets for risk free securities, which in turn allow for the calculation of absurdly named “liquidity”, “matching” or “illiquidity” premiums – with the names changing as fast as the credit ratings of G7 sovereign debt issues.
It could be argued that a shift away from an investment portfolio, which has traditionally been overly exposed to government debt, might be a healthy change. Such changes in demand can however have large adverse price implications in the short term.
It remains to be seen what the eventual Solvency 2 regulations might be, given that both EIOPA and the European Parliament have delayed their timetables for finalising the final regulations.
In fact, these regulations could end up to be anything, as no regulatory commitment has been given by the European Parliament to the draft framework. Such uncertainty might more accurately be to blame for the uncertainty in the investment and capital allocation decisions of European insurance companies and pensions providers.
Did Solvency 2 worsen Euro debt crisis? Some market observers could argue that the impending regulatory changes which will affect the investment decisions of European insurance companies and pensions providers have adversely affected the demand for European government debt.
