Critical Credit Week For Portugal

By the end of the upcoming week it may be clear if is the next Euro country to join the bailed-outs, (Greece and Ireland).  Portugal is reported to be under pressure – just as Ireland was – to accept a bailout package within the coming weeks, and the outcome of Friday’s EU meeting could decide whether it will join the European bailout camp or not.

“An impending rate rise from the European Central Bank won’t make its refinancing task any easier.”

Gavan Nolan


Expectations amongst market participants are high before the important EU meetings on March 11,  and particularly; March 24, The hope is that the EU leaders finally will come up with an EFSF that fits the  purpose, and address the underlying solvency issues of the euro zone. However, these hopes seem to have dwindled over the last two weeks due to Germany hardening its stance.

Investors are all too aware that the European sovereign debt crisis is far from resolved:

Sovereign spreads tightened earlier this year after the ECB intervened in the government bond market. But the improvement was also driven by hopes that the EU was finally becoming less reactive in its approach to tackling the crisis, according to last weeks market summary by Markit Credit Research.

“Portugal is thought to be under pressure to accept a bailout in the coming weeks. An impending rate rise from the ECB won’t make its refinancing task any easier. The outcome of next Friday’s meeting could decide whether it joins Greece and Ireland in the bailout camp,” analyst Gavan Nolan at Markit writes.

However, Libya, Middle-Eeast and rising oil prices are likely to disturb the shaky markets even more in the near future.

Oil, who has been the cause of several recessions during the last 40 years, still has had a significant bearing on trading sentiment

Right now there is two conflicting forces vying for influence over the credit markets, Nolan points out.

“The price of crude has fluctuated between $112 and $118 a barrel in response to events in the Middle East and North Africa. Libya appears to in the early stages of a civil war, with today being called a “Friday of Freedom” by anti-Gaddafi protesters. Government forces have launched counter-attacks on the rebels, and the air force have launched an offensive against Brega, home to Libya’s second-largest largest hydrocarbons centre. Oil supply has been seriously curtailed and this has placed upward pressure on the oil price,” he writes.

“But the pressure is relieved by a belief that Saudi Arabia can and will step into the breach. Saudi has by far the largest reserves in the world and there is no question that it can fulfil this role if necessary. However, Saudi has its own problems, not least the Shia/Sunni strife in its smaller neighbour Bahrain. This has the potential to spill over into Saudi, where 10%-15% of the population is Shia. There is talk of a “Marshall Plan” in the Gulf Cooperation Council (GCC) states. Whether this would be enough to stave off the unrest spreading through the region remains to be seen,” Nolan concludes.

But the influence of oil was somehow offset last week by other economic news.

Data release after data release has pointed towards a brisk pace of growth for the developed economies.

Leading indicators for the manufacturing and services sectors on both sides of the Atlantic provided further indications, and Friday’s US non-farm payrolls, where 192,000 jobs were added, seems to confirm the picture.

The two forces of rising oil prices and growing economies cancelled each other and left spreads more or less flat on the week, according to Markit Financial Information.

But the Markit iTraxx Europe at 99.5 basis points is still about 16 bp’s wider than the Markit CDX IG – a basis that opened up in Q2 2010 and expanded through the second-half of the year.

“The reason for the difference will play a major part in shaping spread direction over the coming months,” Gavan Nolan writes.

Here’s the calender for economic data releases in the week to come.

 

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