No Rest For The Credits

If the EU thought that the bailout announced for Ireland over the weekend would calm the investors in the euro zone then they must have been disappointed by the reaction in the markets today. After an initial positive reception – the financial markets turned negative again. The Markit iTraxx SovX Western Europe was 3.5 basis points tighter, at 162.5bp this morning, but the gains were soon lost and the index finished up 11 points wider, at 177.

“Are bailouts contagious?”

Gavan Nolan

Greek CDS spreads are back up at 1.000 basis points higher than the German benchmark, blasting up by 36 points on Monday. The Portuguese spread blew up nearly 40 bp’s and the Irish widened 25, ending at near record levels of 530. Oh, boy! This is going to be nerve-wrecking…

So, what caused the markets to turns so radically, after the big bailout drama this weekend?

Credit analyst Gavan Nolan at Markit explain:

“Two factors triggered the volatility and are likely to continue to be relevant in the weeks ahead. The first was the intrinsic fragility of the Irish government. Prime Minister Brian Cowen‘s Fianna Fail party has been under intense pressure this year, and it came to a head today when the Green Party – the other partner in the coalition – demanded that a general election be held in the second-half of January. If that wasn’t enough two independent MP’s that currently vote with the government said they would be highly unlikely to support next month’s budget. If Fianna Fail lose a by-election this week – and they are well behind in the polls – their wafer thin majority will be cut to just two seats . This makes the support of the two independents absolutely crucial if the budget is to get through,” Nolan writes in today’s Markit Intraday Alert, and continues:

“The other, closely related factor was the fear of contagion spreading across the euro zone. Portugal is viewed by the markets as the next most vulnerable and its government made efforts today to distance itself from Ireland’s predicament. Unlike Ireland, Portugal has a “resilient and well capitalised” banking sector and won’t require a bailout, according to the government. Nonetheless, the sovereign’s spreads were 40bp wider, at 460 bp’s by the close.”

A general strike against austerity measures could cause further volatility this week, according to Markit Credit Research.

Irish bank CDS was tighter after the bailout announcement due to the anticipation of recapitalisation.

As usual liquidity in these names was poor, and investor sentiment was better reflected in the bond prices. Both senior and sub debt saw increases today, according to Markit Evaluated Bonds, though some of the gains were given back in the afternoon.

“The Markit iTraxx Senior Financials was dragged wider by Iberian banks, which suffered from fears of peripheral contagion,” Gavan Nolan points out.

“A “yes” vote for the 2017 Anglo Irish bond exchange also caused shudders in the financial debt markets.” he notes.

Markit iTraxx Europe 103bp (+2), Markit iTraxx Crossover 462bp (+5)
Markit iTraxx SovX Western Europe 177bp (+11)
Markit iTraxx Senior Financials 141bp (+6)
Sovereigns – Greece 1000bp (+36), Spain 285bp (+24), Portugal 460bp (+39), Italy 193bp (+10), Ireland 530bp (+25), Belgium 143bp (+10)