New All-Time-High For Irish CDS Spreads

The spreads on Irish CDS reached another all-time-high at 530 basis points, Tuesday, as the nation’s governments problems keep mounting. Allied Irish Bank (AIB) announce that it has failed to sell its UK operations, meaning that the government’s preference shares could be converted into ordinary shares. Additionally, the credit market is worried about the recent announced restructuring mechanism in the EU.

“As usual, the core euro zone countries drove the expansion but the dichotomy between core and peripheral countries was less distinct.”

Gavan Nolan

European credit markets lagged their equity counterparts for most of the day but managed a recovery in the afternoon. Investors are now focused on tomorrow’s FOMC announcement and the – near certainty – of additional quantitative easing.

The expectation of monetary loosening by the FED has been the main driver of spread compression in recent weeks.

The markets recall the strong performance of risky assets after the FED’s initial programme of “unconventional” measures. Fundamentals were often disregarded during the rally of 2009; the flood of central bank liquidity deterred the bearish.

The positive direction of recent leading indicators hasn’t changed the consensus view that QE is inevitable; persistently high unemployment is the FED’s main concern.

Yesterday the ISM manufacturing survey came in well ahead of expectations, as did the Markit PMIs for China, India and the UK.

Today’s Markit Euro zone PMI continued the trend, the 54.6 October reading well up on the 54.1 flash estimate, Markit Financial Information reports.

“As usual, the core euro zone countries drove the expansion but the dichotomy between core and peripheral countries was less distinct,” credit analyst Gavan Nolan at Markit Credit Research comments.

Spain was back above the 50 neutral mark and even Ireland was expanding again. However, the performance of Ireland’s sovereign spreads didn’t reflect this good news.

The country’s spreads hit a new record wide level of 530bp today as the problems for the government piled up.

The negative sentiment created by a weekend article in the Irish Independent was compounded today by two unrelated pieces of news, according to Markit.

Allied Irish Bank (AIB) announced that it had failed to sell its UK operations, meaning that the government’s preference shares could be converted into ordinary shares.

“Along with a proposed rights issue, this could take the government’s share to 92% if asset sales aren’t achieved,” Gavan Nolan notes.

To make matters worse for the government, one of its Fianna Fail TDs announced he was resigning his seat. This leaves Brian Cowen‘s administration with a very slim majority – a delicate situation given the upcoming budget vote.

“And all of this in a sovereign market uneasy about the EU restructuring mechanism announced last week,” Nolan writes.

The Markit iTraxx SovX Western Europe was over 160bp earlier in the day before recovering in the afternoon.

Markit iTraxx Europe 97bp (-1), Markit iTraxx Crossover 448bp (-8.5)
Markit iTraxx SovX Western Europe 157.5bp (0)
Markit iTraxx Senior Financials 125.5bp (-0.5)
Markit CDX IG 92.5bp (-2)
Sovereigns – Greece 845bp (+15), Spain 225bp (0), Portugal 402bp (+8), Italy 179bp (+2), Ireland 520bp (+22), Belgium 123bp (+2)

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