The result of the voting in the Greek parliament over renewed confidence to Prime Minister George Papandreou is waited any time soon now. Today’s trading session in the credit market insinuate that investors already seem to be pricing in a victory for the beleaguered Greek minister.
“Papandreou has to survive a vote of no confidence, due around midnight tonight.”
Gavan Nolan
The political future of George Papandreou may be in doubt but the markets seem to be pricing in a victory for the beleaguered Greek prime minister, according to Markit Financial Information.
Euro zone finance ministers put the onus back on the Greek political establishment yesterday when they said that they would refrain from disbursing the next tranche of aid until the next round of austerity measures had been passed.
Before that, more obstacle is to be faced later this month.
“Papandreou has to survive a vote of no confidence, due around midnight tonight. His reshuffle last week, in which he promoted his main rival Evangelos Venizelos to finance minister and deputy PM, seems to have placated his critics within the socialist PASOK party and made his position less precarious,” credit analyst Gavan Nolan writes in Tuesday’s Intraday Alert from Markit.
Pointing out: “Most Greek political analysts expect a slim victory for Papandreou tonight, and that was enough to trigger a bout of short covering.”
The Markit iTraxx SovX Western Europe index was 13 basis points tighter at 211 bp’s, reversing much of the recent widening (it was as wide as 240 last Thursday).
“This had the typical knock-on effect on financials, and that in turn helped the Markit iTraxx Europe rally 4 bp’s to 107.25. We will see whether the rally has legs tomorrow if indeed Papandreou survives the no confidence vote,” Nolan writes.
SABMiller was comfortably the worst performer in the corporate market today after it made a $9.5 billion takeover bid for smaller Australian brewer Foster’s Group.
The offer, representing an 8.2% premium to Foster’s Monday closing price, was rejected by the target company.
“It is entirely possible that this is just the opening gambit from SABMiller, and it could return with an improved offer,” Nolan notes.
Other major brewers could also enter the fray.
That prospect didn’t seem to enamoured the credit markets, where SABMiller’s spreads promptly widened by nearly 20 bp’s to close around 100.
The deal will be financed by existing cash and new debt facilities, and this will have a detrimental effect on the balance sheet.
Sino Forest’s bonds plunged even further today after it was revealed that the company’s largest shareholder, hedge fund Paulson & Co, had sold its entire holding.
It suffered another blow when Fitch cut its rating to BB– from BB+, the agency citing the company’s complex capital structure.
Sino has seen its credit spreads widen sharply since it was targeted by short seller, who highlighted apparent inconsistencies in the company’s reporting.
It’s 6.5% 2017 bond is now trading at 40 – it was trading at 94 at the beginning of this month.
The ISDA Determinations Committee ruled today that a failure to pay credit event had occurred in respect of Irish bank AIB.
“This supersedes the earlier ruling that a restructuring credit event had occurred. A credit event auction for senior and subordinated CDS will be held in due course,” Gavan Nolan concludes.
JUST BREAKING:
REUTERS: The Greek government won a vote of confidence early Wednesday, overcoming a first hurdle in winning new financing to avoid bankruptcy.
More than half the deputies in the 300-strong parliament backed the socialist government of Prime Minister George Papandreou, who reshuffled his cabinet last week to stiffen resolve behind a painful new austerity program.
EconoTwist's 
Credits Rally Without Credibility
The CDS spreads tightened significantly, Tuesday, and the rally gained momentum through the afternoon as investors placed their bets on a Greek “yes” to more austerity measures. Banks also rallied in spite of rumors that as many as 15 institutions will fail the upcoming stress test.
“The markets are aware that the banking books aren’t being tested for sovereign defaults, leaving a sizable credibility deficit.”
Gavan Nolan
Well, here at the Econotwist’s we are just as skeptical to this rally, as we are to the stress test. Even if the Greek should accept another round of crippling austerity, the market participants are still pricing an 80% chance of a national default. And the banks? Hahaha…suckers!
I guess most of you are familiar with terms like “suckers rally” and “pump&dump.”
However , I won’t stretch that any longer – we’ll just have to wait and see, okay.
Now; according to Markit Financial Information, the so-called “French proposal” for private sector participation in Greece’s bailout appears to be gaining traction, with reports that the German banking association sees the French model as a potential solution.
Fitch Ratings have declared that the proposal would still be regarded as a default by the agency but the market didn’t seem to give a damn.
The Greek parliament have been debating the austerity bill while the country is paralyzed by a two-day general strike and protesters are raging in the streets of Athens.
Inevitably, the protests have turned violent again and ought to serve as a reminder that the government will find it difficult to implement these measures, even if they get the votes they need tomorrow and Thursday.
“Nonetheless, the markets were content to ignore the unrest and rally,” credit analyst Gavan Nolan at Markit Credit Research writes in his Intraday Alert.
Adding: “Participants might be looking to add risk ahead of the vote in expectation of a relief rally if the government wins.”
The Markit iTraxx SovX Western Europe index was about 9 bp’s tighter, at 233,5 basis points, driven by the peripheral EU countries.
Spreads in Spain – perhaps the most important gauge of contagion – tightened significantly, and closed at 288 bp’s.
Italy also rallied. The sovereign sold EUR7,885 billion of government bonds this morning, close to the upper end of the target range.
“Demand for the debt was solid and higher than the previous auctions, though the 1.32 bid-to-cover ratio for the 10-year BTP was relatively weak,” Gavan Nolan points out.
The tightening in the peripherals seemed to fuel a broader market rally.
The Markit iTraxx Europe closed about 2,5 bp’s tighter, at 113,25, and it was companies based in the EU periphery that drove the rally, like Gas Natural and Telecom Italia.
A considerable skew has opened up in the index in recent days, the largest since the roll in March, according to Markit.
“The history of the index suggests that this will narrow relatively quickly,” Mr. Nolan writes.
That means that the iTraxx Europe most likely will widen again over the next days.
In another seemingly outburst of irrational exuberance banks also rallied, in spite of news reports claiming that between 10 and 15 of the 91 institutions who are subject to the stress tests are set to fail.
“But the markets are aware that the banking books aren’t being tested for sovereign defaults, leaving a sizable credibility deficit,” the Markit analyst concludes.
And that’s a nice and polite way of putting it.
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