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 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.
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.
|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|
|PGNIG||Oil & Gas||524,733||478,858|
|POLSKA GRUPA ENERGETYCZNA||Utilities||77,479||455,958|
|FOLLI – FOLLIE||Consumer Goods||30,835||446,427|
|BRITISH ASSETS TRUST||Financials||288,565||417,992|
Top 10 ETF
|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
|ENI||Oil & Gas||3,880,000||61,420,400|
|IMPALA PLATINUM HOLDINGS||Basic Materials||1,231,255||22,777,933|
|Name||Sector||Volume||Volume (T-1)||% Change|
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.
- The Anglo Irish Sub Debt Puzzle (online.wsj.com)
- Ireland Takes Over a 2nd Troubled Bank (dealbook.blogs.nytimes.com)
- The fate of Anglo Irish sub-debt (ftalphaville.ft.com)