Europe Prepares For Another "Greek Tragedy"

The national race towards becoming Europe‘s next great “Greece,” and receive the multi-billion bailout prize from from its fellow EU members and the IMF,  is staring to look obvious. At the moment, the credit market is particular focused on one candidate.

“The EU is ready to support Ireland.”

Jose-Manuel Barroso


Wednesday, the market seemed fixated on a possible bailout package after Irish central bank governor Patrick Honohan indicated that the government was putting together a budget that would meet with IMF approval – indicating that the Irish government wants to comply with any and all conditions precedent to the European bailout funds. The European Commission president, Jose-Manuel Barroso, stated Thursday: “The EU is ready to support Ireland.”

With the fixed income markets in the US observing the Veterans’ Day holiday, investors were able to focus even more on concerns in the euro zone peripherals.

“While there was no lack of focus, there was a noticeable lack of liquidity at times as spread movements swung back and forth intraday,” credit analyst Gavan Nolan at Markit writes in Thursday’s Intraday Alert.

Both Spain and Portugal are now back at record wide spreads compared to previous closes, but are at least tighter compared to levels earlier in Thursday’s session.

Spain CDS saw 295 not quite able to test 300 and Portugal was as wide as 510.  Disappointing results in yesterday’s Portuguese bond auction, particularly on yields, are still weighing today as government bond yields widened.

Irish Confusion

“To some degree the back and forth in spreads could be attributed to investors’ confusion about the situation in Ireland,” Nolan writes.

“Yesterday, the market seemed fixated on a possible bailout package after Irish central bank governor Patrick Honohan indicated that the government was putting together a budget that would meet with IMF approval – the implication being that the government wanted to comply with any and all conditions precedent to bailout funds,” he explains.

European Commission President Jose-Manuel Barroso stated, “The EU is ready to support Ireland.”

However, the Irish finance ministry still tries to calm the market participants by indicated that an application to the IMF still not has been made.

“The statement is as obvious as it is lacking in factual proof of a pending aid package, that did not stop some from making the presumption that such a package is imminent.  So it is likely somewhere between somewhere and nowhere, but closer to which end is anyone’s guess,” Nolan comments.

Financials saw weakness again today stemming from the sovereign concerns. The banks at risk of getting hit if Ireland isn’t able to fix its severely damaged Anglo Irish Bank.

“Of particular interest though were levels on the Anglo Irish subordinated bonds.  Earlier in the session, the bank’s lower Tier 2 debt was being priced at 18 vs the exchange offer level of 20% of face,” Gavan Nolan points out.

Despite the bank’s indication that it had no intentions of negotiating the exchange offer, a small consortium of investors have been trying to block the exchange, according to Markit Financial Information.

“Whether the 2% discount is indicative of chances that the exchange offer could be blocked is hard to guess but it is anything but an academic question,” Nolan concludes.

  • Markit iTraxx Europe 105.8 bp (+2.7), Markit iTraxx Crossover 465.0 bp (+10.2)
  • Markit iTraxx SovX Western Europe 177.5 bp (+1.0)
  • Markit iTraxx Senior Financials 147 bp (+3)
  • Sovereigns – Greece 875bp (-14), Spain 280bp (+3), Portugal 480bp (+9), Italy 203 bp (+3), Ireland 600bp (+3)

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