Credits: PIGs Gone Wild

On Wednesday Greece was the major troublemaker in the credit markets, a role that investors appeared to believe the country had left behind. Greek CDS spreads were relatively stable Thursday, but its fellow peripherals, Portugal and Ireland, compensated with further volatility.

“However, investors were happy to overlook sovereign debt problems and focus on earnings and economic releases.”

Gavan Nolan


Portugal’s spreads started widening Wednesday after budget talks between the minority Socialist government and the opposition Social Democrats broke down. The passing of the budget, which is proposing relatively severe austerity measures, is essential for the country in reducing its deficit. Thursday the Irish CDS spread made another jump.

“A nervy sovereign debt market wasn’t enough to stop risky assets recovering some of the ground lost yesterday. Another day of strong corporate earnings and an upward surprise on US weekly jobless claims figures provided ballast to a market still uneasy from revised QE expectations,” credit analyst Gavan Nolan at Markit Credit Research writes in his daily update.

Wednesday Greece was disturbing the peace in the market, a role that investors appeared to believe the country had left behind.

Greece’s spreads widened by over 70bp today, the largest move since the turmoil of June. The credit deterioration was prompted by the Eurostat revising Greece’s 2009 budget deficit to above 15%.

This is over five times the initial estimate of 3%.

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“I always believed that pigs go the slaughterhouse”.
(Walter Annenberg)

The Greek CDS spreads were relatively stable Thursday, but its fellow peripherals Portugal and Ireland compensated with further volatility.

Portugal’s spreads started widening yesterday after budget talks between the minority Socialist government and the opposition Social Democrats broke down.

The passing of the budget, which is proposing relatively severe austerity measures, is essential for the country in reducing its deficit.

“It seems improbable that the two parties aren’t aware of the delicate fiscal situation and it is likely that a compromise will be reached over the mix of tax and spend. But until then the sovereign will be vulnerable to spread volatility,” Nolan writes.

Ireland, a country that has embraced austerity with little opposition from the general public, also widened Thursday.

Unlike Portugal, its recent credit deterioration has in large part been caused by its broken banking sector.

Ireland’s budget deficit has spiralled upwards to 32% of GDP as a consequence of its support for banks, particularly Anglo Irish Bank.

“Investors received another reminder of the state’s painful exposure with the news that a group of subordinated
bondholders are planning to block the proposed debt exchange,” Gavan Nolan points out.

The bondholders are unhappy about the terms of the exchange, which they view as unfair.

But the Irish government has already stated that the terms are non-negotiable and has intimated that it will turn to legislation if it faces opposition.

“Nonetheless, Ireland’s sovereign spreads widened significantly amid doubts about the validity of burden sharing,” Nolan notes.

In contrast to the day before, however, investors were happy to overlook sovereign debt problems and focus on earnings and economic releases.

The earnings season has so far proved to be a strong one, with companies that beat expectations easily outnumbering those that missed.

The trend continued today, with oil majors Royal Dutch Shell and Exxon Mobil gaining from higher oil prices. France Telecom, Potash Corp, Visa and Dow Chemical were among the other companies to beat consensus estimates.

In an otherwise quiet day for economic releases US initial jobless claims were always likely to stand out. The figures
dropped by 21,000 to 434,000, their lowest level in three months,

“The data surpassed expectations and helped markets rally in the afternoon. But the gains were modest, with investors no doubt wary of the news heavy days lying ahead,” Gavan Nolan at Markit concludes.

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