Dow Jones Newswires quotes IMF Deputy Managing Director John Lipsky Tuesday afternoon saying; “euro-zone aid packages should soothe investors.” I suspect the statement is mostly wishful thinking on behalf of Mr. Lipsky. It is, however, yet another sad example of how out of touch with reality these people are. Today the European bond market almost collapsed as the sovereign CDS spreads hit the all-time-high mark for the second time this month.
“All of the peripheral turmoil spelled bad news for the banks.”
The Markit iTraxx SovX Western Europe index cracked up, matching the record wide from earlier this month by exceeding 180 basis points. The Irish CDS spread splashed out another 50 bp’s, closing in on the 600 mark. Portugal is approaching the 500 level and Spanish spreads blasted through the 300’s for the first time in recorded history. Tuesday was NOT a good day in the European credit markets.
“Ireland‘s predicament and the threat of contagion in the euo zone’s periphery caused a fresh bout of risk aversion, egged on by North and South Korea exchanging artillery fire,” credit analyst Gavan Nolan writes in today’s Markit Intraday Alert.
A motion of no confidence in the Irish government was tabled by Sinn Fein this afternoon.
“This casts further doubt on the coalition’s ability to push the December 7 budget through parliament, a necessary condition for the bailout,” Nolan points out.
Prime Minister Brian Cowen announced last night that the parliament would be dissolved after the budget vote, but the opposition parties appears to be determined to push the schedule. (No surprise there).
Ireland’s spreads widened to 580 bp’s amid the political uncertainty and the levels reminiscent of pre-bailout times.
“The much-feared peripheral contagion is still uppermost in investors’ minds,” Gavan Nolan writes.
Anyway – Portugal, widely touted as next in the firing line, saw its CDS spreads jump another 30 basis points on Tuesday, approaching the 500-level.
“The sovereign’s cause wasn’t helped by news that its budget deficit had widened in the first 10 months of 2010, despite tax revenues increasing. The government has failed to contain public spending, partly as a result of higher interest costs on its debts,” Nolan adds.
Portugal has considerable funding needs in the next few months, something the market is well aware of.
Spain, seen as an economy of more “systemic importance” than Ireland or Portugal, saw its spreads surpass 300 bp’s for the first time on record. A three and six-month T-bill auction this morning – usually a formality – did not produce a particular impressive results. The yields were up significantly, compared to the previous auctions and the amount of debt sold was at the lower-end of the Treasury’s indicative range.
“All of the peripheral turmoil spelled bad news for the banks,” Gavan Nolan at Markit Credit Research warns.
And both the Markit iTraxx Senior Financials index and its subordinate counterpart widened sharply today, driven by British and Iberian banks.
“The latter index has underperformed in recent weeks, no doubt helped by uncertainty over the fate of Anglo Irish Bank. The punitive exchange offer was accepted by 2017 bondholders yesterday, and it seems likely that other bondholders will now follow suit. A request for a restructuring credit event was made to the ISDA Determinations Committee today, and a decision will be made in due course,” Nolan writes.
The Dutch finance minister was quoted as saying that subordinated bondholders in Irish banks “will have to bleed” in a restructuring.
It seems like the market already have figured that out.
The prize for the “Quote of Today” goes to IMF Deputy Managing Director John Lipsky who says that “euro-zone aid packages should soothe investors”, according to Dow Jones Newswires.
“Perhaps they will in the coming months and years but the market reaction today suggested investors are unconvinced,” Gavan Nolan comments.
Well, I guess the question for Mr. Lipsky and the IMF is; are the investors systemically important, or not?
- Markit iTraxx Europe 107.5bp (+4.5), Markit iTraxx Crossover 481bp (+18.5)
- Markit iTraxx SovX Western Europe 183bp (+6)
- Markit iTraxx Senior Financials 153bp (+12.5), Sub Financials 263bp (+24)
- Sovereigns – Greece 1000bp (0), Spain 305bp (+22), Portugal 485bp (+30), Italy 201bp (+9), Ireland 580bp (+51), Belgium 149bp (+8)
Related by The Swapper:
- In The Bright Minds Of IMF
- Europe’s Bailout: From Bad To Worse
- The Fight Against Currency War
- No Rest For The Credits
- Ireland Applies For Bailout – IMF Plans Dramatic Spending Cuts
- IMF’s Lipsky Says Portugal Hasn’t Sought Aid, Facilities Exist (businessweek.com)