Irish Sovereign CDS Spread Exceeds 500 Basis Points

The Irish sovereign CDS spread exceeded 500 basis points Thursday – for the first time in recorded history. The future of Anglo Irish Bank is at the heart of Ireland‘s problems. The state has poured money into the failed bank but investors are concerned that the eventual cost of a bailout will be too great for the country to bear.

“The government have strenuously denied that senior debt will be restructured. Subordinated debt, on the other hand, is another question.”

Gavan Nolan


Risky assets experienced a difficult session as a combination of mixed economic data and heightened concerns over Ireland fueled negative sentiment as the price of insuring the nations debt went through the roof.

Ireland is the new black sheep of the sovereign CDS world, and its spreads exceeded 500bp Thursday for the first time on record.

“Given that it was only last Friday when the 400bp level was breached, the rapid widening in spreads reflects the severity of Ireland’s credit deterioration as perceived by the market. The prospect of a medium-term IMF/EU intervention – as mooted in a research report last week – triggered the latest bout of widening, and a well-received bond auction on Tuesday failed to provide the boost many expected,” Markit Financial Information Service writes in its daily update.

The future of Anglo Irish Bank is at the heart of Ireland’s problems.

The state has poured funds into the failed bank but investors are concerned that the eventual cost of the bailout will be too great for the country to bear.

Gavan Nolan

“Rumours are circulating abound that bondholders will be forced to share some of the pain. The government have strenuously denied that senior debt will be restructured. Subordinated debt, on the other hand, is another question,” vice president Gavan Nolan at Markit Credit Research writes.

Finance Minister Brian Lenihan has been less than emphatic in denying that subordinated bondholders will not get all of their money back.

The bank’s CDS spreads reflect the bifurcation in senior and subordinated debt.

The latter CDS are now trading around 47 points upfront (equivalent to over 2000bp using 20% recovery rate), indicating high probability of default.

AIB and Bank of Ireland were also significantly wider today, rumours of a bank default in the morning session not helping.

Ireland’s Q2 GDP figures only added to the negative sentiment.

Ireland’s economy shrank by 1.2% in the second quarter, confounding expectations of a small rise.

On a GNP basis – a more useful measure because of the high level of multinational corporate activity – the economy shrank by 0.3%.

“The disappointing figures raise doubts about Ireland’s severe austerity policies, and will no doubt influence the political discourse in the UK,” Nolan says.

More Bad News

Yet more bad news came in the form of Markit PMIs.

The Markit Flash Eurozone PMI slumped to 53.8 in August, a seven-month low and far worse than expected.

The leading indicator is pointing towards a slowing of growth in the region over the third-quarter.

Weaker than expected US initial jobless claims figures completed the negative economic picture.

“But there was glimmer of hope for optimists with the US existing homes sales figures, which were better than expected. Housing starts earlier this week also beat expectations, and the data helped spreads come off their wides. Even banks, which were underperforming throughout the day, improved during the afternoon,” Gavan Nolan points out.

The Markit iTraxx Senior Financials index was 3.5bp wider at 148.5bp after being as wide as 155.5bp earlier in the day.

Sovereigns also staged a comeback, the Markit iTraxx SovX Western Europe finishing the day tighter.

UPDATE:

  • Markit iTraxx Europe 116.5bp (+2.5), Markit iTraxx Crossover 528bp (+9)
  • Markit iTraxx SovX Western Europe 160bp (-1)
  • Markit iTraxx Senior Financials 148.5bp (+3.5)
  • Sovereigns – Greece 797bp (-4), Spain 225bp (-11), Portugal 405bp (+14), Italy 195bp (-2), Ireland 475bp (+15), Belgium 141bp (-4), Hungary 347bp (0)
  • BP 198bp (+1)
  • AIB  – Snr 615bp (+31), Sub 965bp (+35), Bank of Ireland – Snr 525bp (+33), Sub 815bp (+31), Anglo Irish Bank – Snr 16 points upfront, Sub 47 points upfront

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