“The state of the sovereign CDS market today could only be described as one of capitulation,” Markit Credit Reasearch writes in Thursday’s Intraday Alert. For those who still don’t belivie in the contagion effect, and the possibility of both financial and social unrest spreading from the peripheral Europe into the euro zone core; be prepared for the worst.
“Records for spreads have been broken with regularity in recent days but today they were shattered.”
The Markit iTraxx SovX Western Europe index, which widened by 14.5 basis points, to 240 bp’s this morning. Less than two weeks ago it was trading at 186 – a move of more than 50 points. The turmoil in the sovereign market had a direct impact on the broader credit markets, with the Markit iTraxx Europe widening 6 bp’s to 116, its widest level since November 2010.
Credit analyst Gavan Nolan at Markit comments:
“The state of the sovereign CDS market today could only be described as one of capitulation. Records for spreads have been broken with regularity in recent days but today they were shattered.”
And, of course, spreads in the peripherals continued to widen into unchartered territory:
Greece – 1,900 bp’s, + 174 – went even further into the stratosphere, its spreads touching almost 2,000 basis points.
“The disunity within the EU corridors of power, as well as the political and social upheaval in Greece, has shaken the markets. Investors have been alarmed that the two factions – Germany and its allies on one side, France and the ECB on the other – have been unable to reconcile their differences,” Gavan Nolan writes.
But news emerging this afternoon suggests they will be given more time.
Previously the IMF had insisted that a bailout agreement was a necessary condition for its cooperation.
The news helped spreads recover some ground in the afternoon, according to Markit Credit Reasearch.
But the recovery was modest, and a closer look at the reported terms of the deal revealed why:
“Familiarity with the current Greek political situation will show that this is far from a foregone conclusion,” Nolan points out.
Several senior members of his cabinet have resigned and Papandreou is now facing a no confidence vote.
“This political instability is heaping even more pressure on Greece from the capital markets, making further spread volatility all but inevitable.”
Portugal (810, +21) and Ireland (805 bp’s +34), the two countries viewed as the next most vulnerable by the markets, also widened sharply.
Spain (300 +13) saw its spreads widen to over 300 bp’s for the first time since January this year.
The Iberian country is widely perceived to have decoupled from the other peripherals, and its spread performance reflects this.
However, the plight of Greece and the panic in the sovereign market has brought the risk of contagion to the fore again.
“This is the real risk that the market fears, and the Spanish CDS is a good a gauge as any of this fear. Investors know that a Spanish bailout would be of a different order altogether to those that have passed thus far. Weak demand for Spain’s bond auction today suggests that the decoupling theory has its doubters,” Gavan Nolan writes.
The recent volatility in the sovereign market has resulted in liquidity being concentrated in the index, i.e. the Markit SovX WE.
“Volumes were almost twice the monthly average yesterday and its is likely that they are high today. A large positive skew has opened in recent days, again indicative of participants preferring the liquidity of the index to the patchy single names,” Nolan concludes.
Related by the EconoTwist’s:
- “The Euro Zone Is Already a Transfer Union”
- The Negative Feedback Loop
- Greek CDS Spreads Jump To World Record
- The Grand Greek Finale
- Greek Commissioner Lets Cat Out of the Bag
- Ex. Goldman Chief Economist Comment on European Debt Crisis
- Munchau: The Most Dangerous Phase of the Crisis
- Financial Monsters Threaten Democracy, Former Portuguese President Says
- FTSE 100 drops as Greek debt woes triggers global rout (telegraph.co.uk)
- Greek crisis hits world markets (guardian.co.uk)
- EU official expects Greece to get next aid payout (ctv.ca)
- Europe’s hidden, peripheral volatility (ftalphaville.ft.com)