Tag Archives: Brian Lenihan

Irish CDS Spreads Hits A Whopping 600 Basis Points

The sovereign bond market’s underperformance seen over the past week was extended Thursday, with the Markit SovX Western Europe index coming close to touching the record wides of 170bp reached in May. Ireland was again the catalyst: its spreads hitting 600bp for the first time amid heightened political risk. Finance Minister Brian Lenihan announced the scale and timing of budget cuts this afternoon, and the front loading of the cuts is aimed at appeasing the markets.

“It will raise questions on the effect of even more austerity on a country suffering from private sector deleveraging.”

Gavan Nolan


The Markit SovX Western Europe index came close to touching the record wide of 170bp reached in May. Ireland was again the catalyst, with its CDS spreads hitting 600bp for the first time amid heightened political risk.

Amongst the influential factors,  can be mentioned:

  • A high court ruling that described an 18-month delay as “unreasonable” has forced the government to hold a by-election later this month.
  • The ruling Fianna Fail party are expected to lose the seat, trimming the government’s already slender majority.
  • The budget vote is to be held on December 7, and a defeat would trigger calls for a general election.
  • Further by-elections next year make this an even stronger possibility.

“Finance Minister Brian Lenihan announced the scale and timing of budget cuts this afternoon, and the front loading of the cuts is aimed at appeasing the markets. But it will raise questions on the effect of even more austerity on a country suffering from private sector deleveraging,” credit analyst Gavan Nolan point out in the Thursday’s Intraday Alert

But Ireland’s predicament had negligible impact beyond the sovereign market. The vast majority of the corporate market tightened as QE bathed the credit world in positive sentiment.

Unsurprisingly, cyclical sectors such as commodities were among the strongest performers. But BHP Billiton’s spread tightening today was driven by news out of Canada, not the US.

The Canadian government announced that it had rejected BHP’s takeover bid for Potash Corp.

“BHP’s spreads widened sharply when the deal was first mooted in August and many bondholders will be relieved if it doesn’t go through,” Nolan writes.

Yesterday’s quantitative easing announcement acted as a boon to risky assets today as investors welcomed the liquidity injection.

The FED says it would purchase an additional $600 billion of securities over the next eight months and left the door open for further action if warranted by economic conditions.

Given that monetary easing was priced in by the markets the FED had little choice but to deliver.

“Nonetheless, confirmation of the Fed’s commitment to supporting the economy has created positive sentiment, at least in the financial markets. The Bank of Japan could well follow suit in the next few days; it has already taken the radical step of starting a QE programme. Jean-Claude Trichet‘s non-event of a press conference this afternoon did little to alter expectations that the ECB is unlikely to shift its hawkish stance. The Bank of England is certainly more dovish, but the recent strong economic data no doubt stayed its hand this month,” Mr. Nolan at Markit concludes.

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Ireland Blows Up

The costs of insuring Irish sovereign debt made another jump Wednesday, and reached a new record high of 545 basis points. The Irish finance minister have announced that the new “fiscal adjustments” – meaning; spending cuts and tax hikes – will be made public on Thursday, instead of in December’s budget. Meanwhile the largest group of protesters in a generation takes to the streets of Dublin in a violent clash with the national police.

“Investors are concerned about the government’s slender majority and its ongoing exposure to Ireland’s beleaguered banking sector.”

Gavan Nolan


Sovereign underperformed yet again, with Ireland setting another record wide. Finance minister Brian Lenihan claims that problems in Greece and Portugal are pushing Ireland’s spreads wider but this isn’t reflected in the CDS market, according to Markit Financial Information.

“If anything, it is Ireland dragging its fellow peripherals wider, though each country has its own issues,” credit analyst Gavan Nolan writes in the Daily Intraday Alert.

Greece and Portugal have been widening but are still some way off their records.

Lenihan took an unusual step Wednesday by bringing forward the fiscal adjustment announcement. The amount of spending cuts and tax hikes will now be revealed tomorrow instead of in December’s budget.

“Whether this is enough to appease the markets is questionable; investors are concerned about the government’s slender majority and its ongoing exposure to Ireland’s beleaguered banking sector,” Nolan comments.

Students Riot

Meanwhile, the largest student protest in a generation was arranged yesterday, with violent clashes in which bricks, beer cans, eggs and placards were hurled at gardaí. (Irish police).

The Union of Students in Ireland (USI), which mobilised over 25,000 for the protest, says they distanced themself from a group of breakaway protesters involved in clashes outside the Department of Finance on Merrion Street in Dublin, the Irish Times reports.

The USI blamed “left-wing” groups for the “destructive and anti-social violence” which it said would only divert attention from its campaign against higher student fees.

Supporters of Sinn Féin, the Socialist Workers Party and republican socialist group Éirígí were prominent among about 50 protesters who made it inside the Finance building, only to be swiftly ejected by the authorities.

Guards in riot gear drew their batons and mounted officers were deployed during clashes with several youths that lasted about 45 minutes. The police believe a core of “militant and aggressive” protesters not connected with the USI tried to “hijack” the event.

The Q-thing

Most investors were expecting a relatively tepid trading session today and that is exactly what they got.

Unsurprisingly, spreads were directionless as the markets awaited the FOMC decision after the European close.

“Further quantitative easing is all but certain, the only doubt is on the scale and the timeframe. Recent statements from the FED have indicated a more gradual approach, and the FOMC might well keep the commitment open-ended to give it more flexibility,” Nolan writes.

“It is possible that investors would suspect the FED of timidity if the amount of securities purchased is below expectations,” he adds.

Ben Bernanke and his fellow governors would be loath to disappoint the markets given that higher equity prices is one of the mechanisms QE uses to boost the real economy (the public are presumed to feel more wealthy and therefore more willing to spend).

“After the Republicans taking control of the House in yesterday’s mid-terms elections, the slim chance of further fiscal stimulus sees to have disappeared. That means there will be even more pressure on the FED to deliver growth and reduce unemployment,” Gavan Nolan points out.

According to media reports Wednesday, Bernanke & Co will purchuase assets and equites for a total of USD 600 billion over the next months.

That is above the upper end of the range of expectations ($300-500 bln) or 50% more than the mid; Fed may be reacting in part to election results (i.e., less likelihood of fiscal policy coordination)

The credit market ‘s reaction in IG corporates, equities and US governments lurched back and forth around either side of unchangef.

5-years CDS on US was about 3 bps wider Wednesday afternoon in Europe.

Risky assets were flat for most of the day but lost ground in the afternoon, despite solid economic data from the US.

The ISM non-manufacturing index came in at 54.3 for October, a significant increase from the 53.2 September reading and well above the 53.5 consensus estimate.

This follows on from a strong manufacturing survey on Monday and robust Markit PMIs throughout the week.

The ADP employment report published today was also above expectations.

“”None of this, of course, will have any impact on the FED decision but if the positive trend continues it could affect the delivery of QE in the months ahead,” Gavan Nolan concludes.

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