The Cover Story In Credits

The European credit market tumbled into another turbulent week on Monday,  rolling over the volatility from last week.  The delicate situation in the euro zone continued to grip the markets. Ireland’s government offered a public show of resistance, stating that it will stand alone and had no intention of renouncing its hard-won economic sovereignty. However, reports today suggest that a decision could be reached at a meeting of EU finance ministers, Tuesday.

“The expectation of a bailout for Ireland helped its spreads to recover from last week’s capitulation. It should also be noted that dealers are thought to be short and are likely covering their positions, thereby accentuating the rally.”

Gavan Nolan


The bailout for Ireland that many expected to be announced over the weekend didn’t materialise, though it was acknowledged for the first time that talks had taken place. Investors are now taking positions in case of an Irish bailout announcement on Tuesday.

ECB Vice-President Vitor Constancio says that Ireland could use the bailout funds to recapitalize its banks, an implicit recognition that the country’s problem is one of solvency as well as liquidity.

The remark naturally sparked a sharp rally in Irish bank spreads, albeit on usual low liquidity, according to the Intraday Alert from www.markit.com.

“Nonetheless, the expectation of a bailout for Ireland helped its spreads to recover from last week’s capitulation. It should also be noted that dealers are thought to be short and are likely covering their positions, thereby accentuating the rally,” credit analyst Gavan Nolan writes.

Elsewhere in the sovereign world; Greece – the front-runner in the current crisis – served up another reminder of the scale of the problems facing the country.

Eurostat revised upwards Greece’s budget deficit to 15.4% of GDP compared to the previous estimate of 13.6%.

The revision means that Greece will miss the target set by the IMF and the EU as a condition of its May bailout.

“Greece’s Prime Minister George Papandreou reiterated his commitment to austerity but the failure to meet the target will inevitably raise the prospect of a debt restructuring further down the line,” Nolan points out.

M&A activity in the US helped the market shrug off mixed economic data.

Caterpillar announced that it had agreed to acquire Bucyrus International, a maker of mining equipment, for $8.6 billion.

The news triggered speculation that more deals in the industrial and mining sectors could be in the offing. It wasn’t all good news for manufacturing, though.

The Empire State survey for November dropped sharply to -11, confound expectations of a slight fall.

US retail sales provided some optimism, rising by a better than expected 1.2%.

“But the sales excluding autos were up by a lacklustre 0.2%, in line with consensus estimates,” Markit notes.

BHP Billiton formally withdrew its offer for Potash Corp today, conceding defeat in the face of the Canadian government’s opposition to the deal.

The government announced that it was blocking the deal earlier this month, leaving BHP with little room for manoeuvre.

BHP’s spreads tightened further today, reflecting credit investors’ relief that the $40 billion deal wouldn’t be completed.

The company announced a share buyback after the deal fell through, reminding credit investors that the board will be under pressure to push through additional shareholder-friendly actions.

  • Markit iTraxx Europe 102bp (-1.5), Markit iTraxx Crossover 455bp (-5)
  • Markit iTraxx SovX Western Europe 162bp (-6.5)
  • Markit iTraxx Senior Financials 134bp (-5)
  • Markit CDX IG 91.75bp (-2)
  • Sovereigns – Greece 860bp (0), Spain 250bp (-11), Portugal 420bp (-20), Italy 182bp (-8), Ireland 495bp (-45), Belgium 137bp (-3)

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