European Weekly Credit Wrap; Counting on QE 2

Two events have dominated the sovereign CDS world this week, one important and the other markedly less so. The first was the Irish government’s clarification of its bank bailout plans. The uncertainty surrounding the issue has made a major contribution to market volatility in recent weeks, and Ireland’s spreads went beyond 500bp to another record wide on Tuesday. Finally, on Thursday morning the government published details of its plans.

“The country’s budget deficit for 2010 will now be astonishing 32% of GDP, over 10 times the amount set out in European Union guidelines.”

Gavan Nolan



The total cost of the Anglo Irish Bank bailout has been placed at EUR29.3 billion, up from the previous estimate of EUR25 billion but in line with newspaper reports during the week. This, however, was based on a baseline scenario. Under a “severe hypothetical stress scenario” a further EUR5 billion of capital will be needed, bringing the total cost to EUR34,3 billion, according to Friday’s market wrap by Markit.


“The stress scenario is based on a 65% fall in commercial property values from their peak, which would result in losses of 43% to 70% on the remainder of the non-NAMA portfolio,” vice president Gavan Nolan at Markit Credit Research points out.

Allied Irish Bank – Ireland’s second-biggest bank and of greater systemic importance than Anglo Irish – will also require additional capital.

The government will be putting another EUR3 billion into the bank as a result of higher haircuts on the last tranche of loans transferred to NAMA.

This will make it the majority shareholder.

“Unsurprisingly, the bailout will have a drastic effect on the sovereign’s fiscal position, even if subordinated bondholders share some of the burden. The country’s budget deficit for 2010 will now be astonishing 32% of GDP, over 10 times the amount set out in European Union guidelines. The government responded by announcing that it would step up its already severe austerity measures. It seems unlikely that economic growth – already anemic – will not be hindered by this policy. Ireland’s spreads have rallied on short-covering but are still more than double early August levels,” Nolan writes.

On the thorny issue of Anglo Irish’s bondholders, the government fulfilled expectations that senior debt will be protected and subordinated bondholders will have to share the burden of the bailout.

The finance ministry statement specifically mentioned Anglo Irish and Irish Nationwide Building Society (also under government control) as being subject to debt reorganization.

“This appears to rule out Bank of Ireland and Allied Irish Bank. However, given the high-level of government ownership in the latter some investors may fear that the government could change its mind if the losses start to mount.”

Nolan also highlights the point of uncertainty is what form the “burden-sharing” will take. saying; “A punitive tender is one of the possibilities, as is a debt/equity exchange. The case of Bradford and Bingley – where sub bondholders were effectively pushed down the capital structure through non-payment of coupons – caused a credit event last year. Market participants will be keenly anticipating clarification from the Irish government. Unsurprisingly, Anglo Irish senior CDS outperformed sub CDS.”

“Interestingly, the same pattern was seen in AIB,” he notes.

A larger peripheral euro-zone country was also in focus on Thursday.

Spain lost its last remaining AAA rating after Moody’s downgraded it to Aa1. The agency cited the country’s poor growth prospects and potential difficulties in reducing its budget deficit.

The announcement came as little surprise to the markets and spreads were largely unchanged. Spain already trades with an implied rating of BB, according to Markit data, and its spreads are significantly wider than the average AA sovereign.

Overall, the week was a positive one for credit, with the Markit iTraxx Europe at its tightest level for two weeks.

The economic picture has been mixed. Relatively strong data from China – both the Markit/HSBC Manufacturing PMI and government-sponsored PMI were above expectations – ran alongside relatively weak PMIs from Europe.

Today’s ISM Manufacturing survey was in line with estimates but the prices component posted a big jump. This worried investors hoping for the next round of QE to commence next month.

A speech from Fed governor William Dudley today indicated that at least one member of the FOMC is in favor of further expanding the Fed’s balance sheet.

Adam Posen, the newest member of the Bank of England‘s rate setting committee, also made clear that he is in favor of more QE.

“Whether their colleagues join them will depend on the data,” Nolan states.

“Next week’s ISM and Markit PMI surveys, as well as non-farm payrolls, will therefore be important in determining spread direction.”


Unique Market Activity

The ‘Unique Market Activity’ section lists stocks which were not active on Markit BOAT on the previous trading day.


Name Sector Volume Turnover €
GEM DIAMONDS Basic Materials 1,296,654 2,933,311
JPMORGAN CHASE & CO. Financials 42,750 1,208,051
TAURON POLSKA ENERGIA Utilities 720,407 1,103,075
ALLIANCE OIL Oil & Gas 94,100 906,218
ALMIRALL Health Care 74,196 607,466
PGNIG Oil & Gas 524,733 478,858
POLSKA GRUPA ENERGETYCZNA Utilities 77,479 455,958
FOLLI – FOLLIE Consumer Goods 30,835 446,427
GEMINA RNC Industrials 844,282 430,584
BRITISH ASSETS TRUST Financials 288,565 417,992

Top 10 ETF

Name Volume Turnover €
DJ STOXX 600 OPTIMISED BASIC RESOURCES SOURCE ETF 122,300 39,085,614
DJ STOXX 600 OPTIMISED HEALTH CARE SOURCE ETF 369,450 37,959,163
ISHARES STOXX EUROPE 600 UTILITIES DE 706,317 21,613,300
DJ STOXX 600 OPTIMISED BANKS SOURCE ETF 280,278 19,853,989
LYXOR ETF MSCI EUROPE 181,220 16,352,202
ISHARES DJ ST 600 TELECOM DE 513,000 13,902,300
ISHARES DJ STOXX 600 DE 345,000 9,153,747
ISHARES II PLC – ISHARES DJ EURO STOXX 50 275,065 7,496,098
DB X-TRACKERS – DJ STOXX 600 163,565 7,077,458
GOLD BULLION SECURITIES 67,620 6,335,349

Top 10 Trades

Name Sector Volume Turnover €
TELEFONICA Telecoms 7,631,820 139,013,602
HSBC Financials 8,805,600 66,059,961
ENI Oil & Gas 3,880,000 61,420,400
BBVA Financials 6,170,000 61,113,848
BARCLAYS Financials 15,000,000 52,977,777
DAIMLER Consumer Goods 800,000 37,120,001
VODAFONE Telecoms 17,077,700 31,194,756
TOYOTA Consumer Goods 1,057,500 28,295,863
L’OREAL Consumer Goods 300,000 24,570,000
IMPALA PLATINUM HOLDINGS Basic Materials 1,231,255 22,777,933

Major Movers

Name Sector Volume Volume (T-1) % Change
BBVA Financials 18,385,360 3,598,166 411%
INFINEON TECHNOLOGY Technology 13,856,272 3,368,190 311%
TESCO Consumer Services 14,443,162 4,373,842 230%
INTESA SANPAOLO Financials 24,165,079 8,124,103 197%
UNICREDIT Financials 28,673,149 10,979,232 161%
NOKIA Technology 14,344,670 6,632,092 116%
BARCLAYS Financials 27,301,842 15,735,449 74%
VODAFONE Telecoms 49,464,931 32,098,454 54%
HSBC Financials 39,529,911 27,070,038 46%
LLOYDS Financials 49,194,173 35,203,569 40%

Markit BOAT is a trade reporting platform which consolidates pan-European cash equity trade data from MTFs, Dark Pools and OTC transactions. The trading activity in this report took place on 27th September 2010 and was published by Markit BOAT on the same day.

Related by The Swapper:

FED Adds QS To QE: Here’s The Transcript of Bernanke’s Testimony

Ireland To Cancel All Bond Sale In 2010

Irish Finance Minister: Concerted Attack On The Euro Zone

Confusion Reigns

Anglo Irish Downgraded – No Surprise

EUR Knocked Off Its Pedestal

Irish Sovereign CDS Spread Exceeds 500 Basis Points

Ireland And Portugal Close To Collapse

Irish CDS Spreds Back To Record High After Bond Sale

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