Tag Archives: Credit default swap

The Negative Feedback Loop

I think I’ve discovered another crack in the EU’s financial defence system, thanks to a little hint from Markit Financial Information. In fact, it might illustrate a global problem that only can lead to an intensified financial – and political – crisis.

It appears that the foreign take-up of the debt was down from the previous auction, meaning that Greek banks were significant buyers.

Gavan Nolan


We know the US FED use it’s primary dealers to buy American debt. The ECB have just recently started to buy European debt through similar arrangements with large European banks. Now we learn that Greek banks are buying most of the Greek debt. Does this mean that governments are putting huge amounts of debt back into an already insolvent banking industry?

To me it looks more and more so.

I really hope it’s not true. That would definitively be like putting out fire with gasoline.

One might certainly wonder who’ll finally end up with the bill…

Today’s session in the credit markets was dominated by Greece and its EU masters, and resulted in risky assets rallying.

Surprised?

Spreads opened tighter after a solid show on Wall Street last night.

But the markets were soon focused on Greece after a wire report stating that a new bailout package had been agreed.

The reports say that EUR27 billion next year, and another EUR32 billion in 2013, would be forthcoming to plug the funding gaps.

And as usual the Greek government officials was swiftly out and denied the reports, but I belive investors have become accustomed to ignoring such protestations.

Sad, but true.

Spreads were tighter on the news and didn’t give back much of their gains after the denial.

That Greece needs external assistance isn’t doubted – the government and the EU have already declared that Greece won’t be able to access the capital markets next year.

What is uncertain is the conditions that the EU will demand and whether there will be a maturity extension on Greek debt, both to the EU and private lenders, credit analyst Gavan Nolan points out in Tuesday’s Intraday Alert.

And the reports of a further bailout probably influenced demand at Greece’s debt auction this morning.

The sovereign managed to sell EUR1.625 billion of 6-month T-bills, with a bid-to-cover ratio of 3.58 and a uniform yield of 4.88%.

This compared favourably with the auction last month and was quite an achievement given the recent inversion in Greece’s credit curve (see above).

But it appears that the foreign take-up of the debt was down from the previous auction, meaning that Greek banks were significant buyers, Gavan Nolan at Markit writes.

Adding: The negative feedback loop between the sovereign and the banking sector is as strong as ever.

And there you have it – the negative feedback loop – it can’t be good. In fact, in can be very dangerous. 

Throughout the day, various EU dignitaries weighed in with their comments.

Angela Merkel was circumspect, only saying that she would wait for the results of the EU/IMF review in June.

EU commissioner Olli Rehn agreed that it was premature to ask about Greece’s refinancing needs in 2012. Rehn, however, did say that Portugal’s interest rate would be between 5.5% and 6% and that Ireland’s interest rate would be reduced.

The commissioner stuck to the party line on restructuring, i.e. that they are not being considered.

Spreads in Ireland and Portugal were only slightly tighter, suggesting that market participants are wary of further developments on this front.

If recent history is anything to go by it seems likely that the picture will become more muddied ahead of Monday’s eurogroup meeting, Nolan notes.

In the US the noise around Greece probably had little impact on sentiment, according to Markit, and points to the news of Microsoft acquiring Skype for $8.5 billion.

Microsoft is a very strong credit that rarely trades in the CDS market – it has a relatively poor Markit Liquidity Score of ‘4’ and it is not in the 1000 top traded entities in the DTCC Trade Information Warehouse, Nolan writes

Adding: From a credit perspective the Skype acquisition shouldn’t impinge on Microsoft’s credit profile given its enormous cash pile. The company’s spreads were trading around 35-40bp, slightly tighter compared to yesterday.

  • Markit iTraxx Europe S15 97.25bp (-1.25), Markit iTraxx Crossover S15 356bp (-4)
  • Markit iTraxx SovX Western Europe S5 189bp (-6.5)
  • Markit iTraxx Senior Financials S15 135.5bp (-4), Markit iTraxx Subordinated Financials S15 234bp (-9)
  • Sovereigns – Greece 1305bp (-53), Spain 249bp (-10), Portugal 650bp (-6), Italy 156bp (-8), Ireland 672bp (-11)

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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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And It Wasn’t Even Against the Law

Someone made a helluva lot of money this week. But most silver speculators, however, received a rather disturbing phone call from their brokers, that in turn reinforced the sell-off in silver, forcing the devils gold to take the biggest drop in more than 30 years. This is the kind of volatility that makes money – big money.

At this stage no one can be sure what is causing the sell-off, though there seems to be consensus that commodities as an asset class had got ahead of itself.

Gavan Nolan


Investors shifted quickly focus this week amid a sharp, and not quite explainable,  sell-off in commodities. Silver, in particular, made a spectacular decline. The price of the second most precious metal dropped by more than 25% during the week – the biggest correction for more than 30 years.

But a correction had to come at some point. The silver price has nearly doubled since the beginning of the year.

A series of margins calls by exchanges have no doubt contributed to the precipitous decline, credit analyst Gavan Nolan at Markit points out in his weekly summary.

But silver is not the only commodity to suffer falls.

Oil, which has also risen sharply over the last year, has been in free fall since Tuesday. Industrial metals such as copper, as well as soft commodities like corn and cotton, also saw large declines.

Were there fundamental reasons for the correction? Economic data, on the whole, has been disappointing this week. Leading indicators for the service sector, particularly the Markit PMIs and the ISM survey, suggested that the recovery in losing momentum in the US and in the UK, Gavan Nolan writes.

Disappointing factory orders from Germany, the driving force of the European economy, added to the unease.

And then there is the US labour market. The swift recovery in job creation that many had hoped for has failed to materialise, with a weak ADP private sector survey and another downbeat initial jobless claims figure depressing sentiment ahead of the non-farm payrolls report friday, Nolan adds.
Whether the economic data alone rationalizes such a major sell-off is open to question, according to Markit Financial Information.

The realisation that interest rates are being hiked across the developing world could have spooked investors. Monetary policy shifts in the developed world will also have an impact on risk appetite. The current round of quantitative easing in the US is expected to end in June (though the Fed balance sheet will stay roughly constant). Many suspect that the liquidity provided by central banks has driven up the price of risky assets. A normalisation of policy could bring an end to the bull-run in commodities. At this stage no one can be sure what is causing the sell-off, though there seems to be consensus that commodities as an asset class had got ahead of itself, Nolan writes.

The reaction in the credit markets to the commodity volatility, however, was relatively sanguine.

Equity indices took a tumble through the week but the main credit indices were fairly resilient.

The Markit iTraxx Europe index was only about 0.25bp wider than last Thursday’s close (post NFP bounce), while the eurostoxx and FTSE 100 were still well down over the week.

Sovereigns helped credit outperform on Wednesday after the EU/IMF bailout of Portugal was announced.

However, these gains were quickly given back during the latter part of the week; talk of Greece restructuring its debt is still hanging in the air, Nolan concludes.

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