Quiet Before The Credit (Card) Storm?

The european credit market seem to be holding its breath as intensive negotiations about possible financial aid to Ireland are ongoing in Brussels, with sovereign CDS spreads still at record high levels. The uncertainty surrounding Ireland may last for another week. And Greece?… However, there’s always a reason to rally.

“Some traders are suggesting that this could result in a split contract and a succession event.”

Gavan Nolan

The expected fireworks in the sovereign market failed to materialise today as spreads in the most vulnerable peripherals were range-bound. Ireland’s spreads recovered from early widening to finish the day unchanged. Finance minister Brian Lenihan said that no “formal application” had been made for aid but the government were in “intensive discussions” with its EU partners.

“We know that an EU-IMF delegation is been sent to Dublin immediately but what form the bailout will take, if it occurs at all, is uncertain. It has become clear in recent days that the assistance will be directed towards Ireland’s banks, which are dependent on the ECB for funding,” credit analyst Gavan Nolan writes in Wednesday’s Markit Intraday Alert.

Adding: “It is likely that this will have to be directed through the government rather than directly, and could take the form of guarantees rather than funds. The UK might also provide direct loans. There doesn’t appear to be any great urgency, so the market might not get clarity this week.”

Ireland didn’t need any more bad news but it received some this morning nonetheless:

LCH Clearnet announced that its margin requirement for Irish sovereign debt had increased to 30%, just a week after it had hiked it to 15%.

The news caused some widening in spreads this morning but this was reversed in the afternoon.

Elsewhere in sovereigns Greece confirmed that the next instalment of emergency loans from the EU and IMF would be delayed until January.

“Austria’s finance minister stated yesterday that the payment would be withheld because of Greece’s failure to meet pre-specified fiscal targets. But Greek and EU officials fought back today and claimed that the delay was due to administration issues and doesn’t create any cash problems “whatsoever”, Gavan Nolan points out.


Greece’s spreads are still well over 900 bp’s.

Portugal outperformed its peripheral peers following a bill auction this morning. But the debt sale wasn’t a resounding vote of confidence from the markets – the yield of 4.813% was up sharply from the previous auction and the bid-to-cover ratio was a lacklustre 1.8.

Cadbury Holdings was the surprise worst performer among the Markit iTraxx Europe constituents today.

“The significant widening appears to have been driven by news that sterling bonds at the Cadbury level will be transferred to Kraft Foods, Cadbury’s parent. Some traders are suggesting that this could result in a split contract and a succession event,” Nolan writes.

Okay, Santa! – We’re Ready!

An important sign of things yet to come, may be reflected in the spreads of the 5-year CDS on retailer giant Target Corp.

CDS and equity on Target rallied Wednesday on earnings results: 3Q profit jump of 23%, revenue growth. Strong signs of improvement in the company’s credit card business: bad debt expenses down 64%,
drop in 90-day delinquency rate to 3.5%.

Recent credit card promotion offers shoppers a 5% discount on all purchases using a Target credit/debit card may also help boost the chain’s holiday results.


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