Credit; Cras Credemus

The investor sentiment in the European credit market suddenly changed on Monday afternoon. Whether it’s just another dead cat bouncing, or investors really see the situation improving, we will find out tomorrow as Greek Prime Minister George Papandreou face a vote of no confidence.

“The catalyst for the change in sentiment seemed to be the announcement that the potential lending capacity of the European Financial Stability Facility (EFSF) will be raised to EUR440 billion. “

Gavan Nolan

The markets expectations for the Eurogroup meeting culminating Monday was never particularly high, but it still proved a disappointment to many. Spreads opened this week wider when it became clear that the euro zone’s finance ministers would not be signing off on the next EUR 12 billion tranche of Greek aid. However, something changed during the trading session.

The Eurogroup confirmed that they would not disburse the funds until the Greek parliament had passed the latest austerity programme proposed by the government.

This wasn’t a surprise to many market participants – noises from the IMF and EU last week suggested this was likely to be the case.

“Nonetheless, the lack of movement and the immense pressure on the Greek government to deliver – prime minister George Papandreou face a no confidence vote tomorrow – was always going to weigh on risk assets,” credit analyst Gavan Nolan at Markit Credit Research writes in today’s Intraday Alert.

But it didn’t turn into a rout, and by late afternoon the market had recovered from the earlier widening.

Sovereigns were still underperforming but at the close the Markit iTraxx SovX Western Europe index was just 1 basis point wider at 223,5 bp’s.

The catalyst for the change in sentiment seemed to be the announcement that the potential lending capacity of the European Financial Stability Facility (EFSF) will be raised to EUR 440 billion, according to Markit Financial Information.

This will be achieved by increasing the amount of guarantees from euro zone member states to EUR 780 billion.

“The restricted lending capacity of the EFSF – due to the AAA rating requirement and the consequent overcollaterisation – has been an issue for the markets, and the fact that the authorities are at least putting measures in place for further bailouts will ease some near-term concerns,” Gavan Nolan writes.

Adding: “Also of importance was the related announcement that the European Stability Mechanism, which is to succeed the EFSF in 2013, will not enjoy preferred creditor status.”

Many though that the preferred status would make it more difficult for countries that tapped the facility to return to the private capital markets.

There was also uncertainty in the market over whether the legal subordination of existing bonds could trigger a credit event.

“Clarification on this issue is therefore to be welcomed,” Nolan comments.

Italy’s spreads were under pressure today after Moody’s placed the country’s Aa2 rating on review for downgrade late on Friday.

The agency highlighted Italy’s well known structural problems – low growth, low productivity and inflexible labour markets – as well as the dangers from the escalating euro zone debt crisis.

In contrast, Moody’s today upgraded Brazil’s rating one notch to Baa2, citing the government’s conservative fiscal policies.

The credit markets have reflected Brazil’s prudence for some time.

“Indeed, the Latin American sovereign has traded tighter than higher rated Italy for over a year,” Gavan Nolan at Markit concludes.

On the personal account, an old latin expression comes to mind;

Cras Credemus, Hodie Nihil – Tomorrow We Believe, But Not Today.

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