The Gaddafi Effect

The drama in Libya, accompanied by the rising oil prices, was naturally the center of investors attention Tuesday.  Libya is the world’s 12th largest producer of oil, and the third largest supplier to Europe, and a potential supply disruption would have a material effect on prices.

“As ex-colonial master Italy has stronger links than most, and the current Italian government has courted a two-way investment relationship with the Gaddafi regime.”

Gavan Nolan


The Markit iTraxx Europe widened to beyond 100 basis points Tuesday morning, hitting this level for the first time in nearly a month, though a slight decline in the oil price to $106 a barrel helped it recover mid-afternoon. Banks and sovereigns were relatively stable today, and it remains to be seen whether the upcoming Irish general election will be overshadowed by events further afield, Markit Financial Information report.

Risk aversion permeated the markets today as investors grappled with the implications of turmoil in the Middle East and North Africa.

After the revolutions in neighbouring Tunisia and Egypt, it now seems that Libya is the next most likely country to see a forced change in government.

The protests have been met with a violent response by the Gaddafi regime, prompting widespread condemnation from world leaders. Senior figures from the government, including the justice minister and ambassadors to the US and UN, have abandoned Gaddafi, according to reports.

“The unrest had a predictable effect on other MENA sovereign spreads, i.e. widening. Libya itself doesn’t trade in the CDS market (no debt outstanding) but Morocco, a more liberal North African country, does. Its spreads widened beyond 200bp today, approaching the levels it reached at the peak of the “Jasmine Revolution” in Tunisia late last month,” credit analyst Gavan Nolan at Markit writes in his daily summary. Adding: “In contrast to the highly autocratic Libya, Morocco does have some level of democracy and is a constitutional monarchy. But protests have still broken out in recent days, with groups as diverse as trade unionists and Islamic fundamentalists calling for less corruption and more press freedom – a reminder that democracy is more than elections.”

Western investors the primary concern was the rising price of oil. Brent crude – now considered a better gauge of global demand due to supply issues for WTI – hit $108 a barrel last night.

Libya is the world’s 12th largest producer of oil, and the third largest supplier to Europe, and a potential supply disruption would have a material effect on prices. Like most Arab countries, the national, state-owned oil firm is the major producer. But there are several western-firms that have operations in Libya, including joint ventures with the government.

“As ex-colonial master Italy has stronger links than most, and the current Italian government has courted a two-way investment relationship with the Gaddafi regime. Eni, the largest Italian oil company, has extensive production facilities in the country, as does Spanish firm Repsol. Both firm’s have seen spread widening this week, though the movements are relatively modest so far,” Nolan points out.

The energy and utilities sectors led the broader market wider, though again the movements weren’t dramatic.

The Markit iTraxx Europe widened to beyond 100 bp’s earlier this morning, the first time it has hit this level in nearly a month, though a slight decline in the oil price to $106 a barrel helped it recover mid-afternoon.

“Banks and sovereigns were relatively stable today, and it remains to be seen whether the upcoming Irish general election will be overshadowed by events further afield,” Gavan Nolan at Markit Credit Research concludes.

See also: Markit. Chart of the Day

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44 responses to “The Gaddafi Effect

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