Greek CDS Spreads Jump To World Record

Nice work! Ladies and gentlemen off the exclusive core EU administration. Thanks to your ridiculous attempt to calm the financial markets by lying, you’ve just made the whole situation worse – for both Greece and all other members of the EU community.

It seems clear that Greece won’t be in a position to return to the capital markets next year, leaving a funding gap in the region of EUR25 billion.

Gavan Nolan

Late last Friday there were reports that Greece was considering plans to leave the euro zone. Jean-Claude Juncker, chairman of the eurogroup of finance ministers, called the rumours “stupid,” and others denied the fact that there was an extraordinary meeting going on. I generally advice people to not use the word “stupid.”

In the credit market risk appetite was on the retreat Monday, though unlike last week commodity prices weren’t the instigator.

It was – not surprising – the familiar and escalating euro zone sovereign debt crisis that triggered negative sentiment.

A crisis that now is about to turn into a political crisis, too.

It emerged over the weekend that a “secret” meeting of finance ministers and senior EU officials had been held on Friday, and Juncker acknowledged that Greece would need further financial assistance.

A restructuring of Greek debt wasn’t discussed, according to reports.

But though there is little chance of haircuts being inflicted on bondholders in the near future, a “soft” restructuring of voluntary maturity extensions is seen as a possibility by many in the market. This would buy some more time for Greece, although it would have little impact on solvency unless the maturity extensions were very long, credit analyst Gavan Nolan at Markit writes in his Intraday Alert.

And S&P seemed to agree. This afternoon the agency downgraded Greece’s long- and short-term ratings to ‘B’ and ‘C’ from ‘BB-’ and ‘B’ respectively.

S&P cited the “increasing sentiment” among euro zone creditors to extend maturities on the bilateral loans pooled by the EC. In S&P’s opinion, the creditor governments would probably seek comparability of treatment from commercial creditors, i.e. a similar maturity extension, according to Gavan Nolan.

The Greek government was quick to respond, stating that the agency is basing its decisions on market rumours and as such its “validity is seriously cast in doubt”.

The usual suspects.

But it seems clear that Greece won’t be in a position to return to the capital markets next year, leaving a funding gap in the region of EUR25 billion, Nolan points out.

Greek officials have admitted that it will have to use the EFSF to raise funds, and there is considerable uncertainty over what other measures could be taken.

Regardless of the merits of S&P’s decision, the CDS market’s view on the sovereign credit is emphatic. Its one-year spreads are trading in excess of 2000bp and its five-year spreads are around 1375bp, the widest of any sovereign in the world, Nolan concludes.

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  • Markit iTraxx Europe S15 98.5bp (+2.75), Markit iTraxx Crossover S15 360bp (+7)
  • Markit iTraxx SovX Western Europe S5 197bp (+8)
  • Markit iTraxx Senior Financials S15 140bp (+7), Markit iTraxx Subordinated Financials S15 242bp (+12.5)
  • Sovereigns – Greece 1375bp (+58), Spain 259bp (+16), Portugal 658bp (+26), Italy 165bp (+12), Ireland 680bp (+25)
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