Tag Archives: Muammar al-Gaddafi

The EU End Game: Deliver, Or Face The Punishment

The European markets are now zooming in on Brussels and the crucial top summit, starting tomorrow Thursday 24. Most market participants are not particularly optimistic, in fact, they’re preparing to punish the EU politicians if  they don’t deliver on they’re promises.

“It now seems unlikely that there will be a compromise at the summit.”

Gavan Nolan


Credit spreads opened wider this morning as traders woke up to higher oil prices and a Japan nuclear situation that is far from resolved.  But the main focus for European markets today, and probably for the rest of the week, is closer to home.

The price of Brent crude broke through $116  barrel in the early hours of this morning and remained above $115 throughout the day, as Colonel Gaddafi made his first speech since the air strikes began and the Libyan leader was defiant as ever, pledging that there will be no surrender to the international coalition.

President Obama announced Wednesday that Gaddafi may try to “hunker down”, raising the prospect of a protracted conflict that will curtail oil supply for an extended period.

But Foreign Secretary Hilary Clinton says, however, that Gaddafi’s camp have been sounding out other countries about a possible exile, making a swift end to his regime a possibility.

The tentative optimism around Japan faded today when workers were forced to evacuate the Fukushima nuclear plant. Smoke was seen coming out of the problematic no. 3 reactor, thereby stopping the repair work that had continued through two aftershocks this morning.

“The indirect effects of the accident are also damaging sentiment. Unsafe levels of iodine have been detected in the Tokyo water supply, and the US has become the first country to ban food imports from the area around Fukushima. Tepco has given back some of its gains from yesterday,” credit analyst Gavan Nolan at Markit writes in his daily Intraday Alert.

Zooming In

But the European markets are now zooming in on Brussels where the important top summit starts Thursday.

There is still plenty of loose ends to tie up; particularly around how the EFSF will reach its full lending capacity and the terms of Ireland’s bailout loans.

We saw Friday with the European bank stress details – no list of the banks involved, capital requirements not defined, no haircuts on sovereign debt held in banking books – how the authorities can disappoint investors.

“Next week’s crucial EU summit has to deliver on its promises if further punishment for the peripherals is to be avoided,” Nolan pointed out in last weeks summary.

Portuguese Trap

Portugal’s minority government faces a crucial vote Wednesday afternoon on its latest austerity programme.

The opposition have already said they will vote against, and if they follow through with their threat then it could trigger a general election.

“This would be an inopportune time for Portugal’s government to collapse, to say the least,” Nolan comments.

Adding: “The two-day EU summit starts tomorrow, and if Portugal’s governance is in disarray then its position will be weakened.”


“Many already expect the Iberian country to have little choice but to accept a bailout before its redemptions in April, and the latest bout of political instability won’t help its cause. Hopes that this summit would yield a “grand bargain” have been fading for some weeks now, and reports emerging today suggest that the pessimism was justified,” the Markit credit analyst writes.

Details of how the EFSF will reach its full EUR440 billion lending capacity will not be agreed at this summit, according to Reuters.

It is probable that domestic politics has had a deal of influence here, according to Nolan

“The government of Finland, one of the AAA-rated euro zone members, has refused to countenance raising its guarantees, no doubt influenced by vocal opposition from right-wing parties at home.”

Angela Merkel’s German government also has domestic considerations that could stay its hand.

Another crucial point that was expected to be resolved this week – Ireland’s bailout terms – could be left hanging. A German official was reported as saying that a deal was unlikely; the situation had not changed since the interim agreement earlier this month.

There is little doubt that Ireland’s 12.5% corporate tax rate is the bone of contention.

“It now seems unlikely that there will be a compromise at the summit. Peripheral spreads widened before recovering later in the afternoon.More volatility can be expected in the days ahead,” Gavan Nolan concludes.

See also:

The EU End Game: Regaining Control

The EU End Game: Decision Time

  • Markit iTraxx Europe S15 104bp (+0.5), Markit iTraxx Crossover S15 385bp (+2)
  • Markit iTraxx SovX Western Europe S5 174.5bp (0)
  • Markit iTraxx Senior Financials S15 149bp (+3), Markit iTraxx Subordinated Financials S15 265.5bp (+7)
  • Sovereigns – Greece 970bp (+7), Spain 219bp (+3), Portugal 531bp (+1), Italy 159bp (0), Ireland 610bp (-9)
  • Saudi Arabia 127bp (+2), Bahrain 335bp (-7)
  • Japan 105bp (+5)
  • Tokyo Electric Power Co – 270bp (+30)

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Global Economy at Peak Risk

Participants in the financial markets already had their hands full before the massive earthquake hit Japan on Friday morning. Of course, the concerns of dealers and investors are trivial in comparison to the human suffering that is being experienced in the far east. Nonetheless, it is yet another factor that has to be taken into account when assessing the risks facing the global economy.

“One thing that we can be sure of is that Japan is one of the best prepared countries for such a disaster.”

Gavan Nolan


The earthquake measured 8.9 on the Richter scale and was followed by at least 34 aftershocks of varying magnitude. A tsunami caused further devastation soon after, and there is a high risk that this form of catastrophe will affect other countries in the hours to come. The Markit iTraxx Japan jumped from 97bp to 105bp immediately after the earthquake but recovered to close around 101.5 basis points, and Japan’s sovereign CDS spreads widened by about 6 bp’s to 85.

It appears that the uncertainty over the extent of the damage has had an impact on the sovereign’s liquidity, with bid/ask spreads as wide as 10bp quoted Friday.

The average is 2 bp’s, according to Markit Liquidity Metrics.

“One thing that we can be sure of is that Japan is one of the best prepared countries for such a disaster. The fact that the epicentre was 80 miles offshore and that it was some way off Tokyo – thought the capital was affected – could also help limit the damage to Japan’s economy. Communications have been impacted by the catastrophe but more news on the devastation should emerge throughout the day,” credit analyst Gavan Nolan at Markit Credit Researdh writes in his weekly market wrap.

Adding that the European markets have seen some increase in risk aversion but nothing dramatic.

“It is still not clear what the cost of the disaster will be but investors are aware that Japan is a wealthy country that has experienced many earthquakes in the past.”

But one sector that will certainly be affected is European reinsurance.

Japanese earthquakes are one of the main peak risk exposures that reinsurers monitor (along with Japanese typhoons, European storms, Gulf of Mexico hurricanes and California earthquakes).

“As such, it is likely that all of the big European reinsurers will be exposed to losses. What the extent of these losses will be probably won’t be known for several weeks but they are likely to have an earnings impact for some, if not a balance sheet impact,” Nolan points out.

Spreads in the big names – Munich Re, Swiss Re, Hannover Re and Scor – have widened significantly today, and are likely to remain volatile in the coming days as more information comes available.

It should, however, be noted that all of these names have solid credit profiles and are well capitalised.

One consequence of the Japan earthquake is that it has helped the price of oil to fall. Expectations of reduced demand from the world’s third-largest economy pushed Brent crude down from $115 to $112.5.

But events in the Middle East also contributed. News that Saudi police had fired rubber bullets on Shia demonstrators led to sharp rise in the price of crude late yesterday.

However, the “day of rage” in Saudi doesn’t appear to have exploded in violence – yet.

Investors seem to be sanguine about developments in Libya, even though Colonel Gaddafi is reported to be gaining the upper hand in the conflict.

“Most would be wise not to underestimate the potential for oil-induced volatility next week,” Nolan warns.

“Perhaps the turmoil in the Middle East has taken a back seat in European markets because investors are preoccupied with events closer to home. Spreads in peripheral eurozone countries have widened this week amid increasing pessimism that the EU has the will to tackle the sovereign debt crisis.”

The “grand deal” that was expected at the summit later this month could turn out be something rather plain and insubstantial.

Reports Friday indicate that Germany has taken a firm line and will not allow the EFSF to be used for buying back government debt.

This places Portugal under even more pressure to accept a bailout in the coming weeks.

The sovereign, along with its Iberian neighbour Spain, is due to issue debt next week, and if today’s interim summit turns out to be a damp squib it will put the auction under extreme scrutiny.

The citizens of Ireland, one of the current bailout recipients, will have been dismayed to hear that the price of a lower interest rate on their rescue loans could be their prized 12.5% corporate tax rate.

News reports also indicate that a harmonised tax rate will be one of the conditions set down by Germany and others.

The 12.5% was a “red line” for all parties in the recent election, and it is hard to see how the new government could compromise on this.

“Friday’s EU meeting is highly unlikely to be a tipping point for the markets, though its outcome will be one of many factors that the market will have to consider next week,” Gavan Nolan concludes.

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The Gaddafi Effect

The drama in Libya, accompanied by the rising oil prices, was naturally the center of investors attention Tuesday.  Libya is the world’s 12th largest producer of oil, and the third largest supplier to Europe, and a potential supply disruption would have a material effect on prices.

“As ex-colonial master Italy has stronger links than most, and the current Italian government has courted a two-way investment relationship with the Gaddafi regime.”

Gavan Nolan


The Markit iTraxx Europe widened to beyond 100 basis points Tuesday morning, hitting this level for the first time in nearly a month, though a slight decline in the oil price to $106 a barrel helped it recover mid-afternoon. Banks and sovereigns were relatively stable today, and it remains to be seen whether the upcoming Irish general election will be overshadowed by events further afield, Markit Financial Information report.

Risk aversion permeated the markets today as investors grappled with the implications of turmoil in the Middle East and North Africa.

After the revolutions in neighbouring Tunisia and Egypt, it now seems that Libya is the next most likely country to see a forced change in government.

The protests have been met with a violent response by the Gaddafi regime, prompting widespread condemnation from world leaders. Senior figures from the government, including the justice minister and ambassadors to the US and UN, have abandoned Gaddafi, according to reports.

“The unrest had a predictable effect on other MENA sovereign spreads, i.e. widening. Libya itself doesn’t trade in the CDS market (no debt outstanding) but Morocco, a more liberal North African country, does. Its spreads widened beyond 200bp today, approaching the levels it reached at the peak of the “Jasmine Revolution” in Tunisia late last month,” credit analyst Gavan Nolan at Markit writes in his daily summary. Adding: “In contrast to the highly autocratic Libya, Morocco does have some level of democracy and is a constitutional monarchy. But protests have still broken out in recent days, with groups as diverse as trade unionists and Islamic fundamentalists calling for less corruption and more press freedom – a reminder that democracy is more than elections.”

Western investors the primary concern was the rising price of oil. Brent crude – now considered a better gauge of global demand due to supply issues for WTI – hit $108 a barrel last night.

Libya is the world’s 12th largest producer of oil, and the third largest supplier to Europe, and a potential supply disruption would have a material effect on prices. Like most Arab countries, the national, state-owned oil firm is the major producer. But there are several western-firms that have operations in Libya, including joint ventures with the government.

“As ex-colonial master Italy has stronger links than most, and the current Italian government has courted a two-way investment relationship with the Gaddafi regime. Eni, the largest Italian oil company, has extensive production facilities in the country, as does Spanish firm Repsol. Both firm’s have seen spread widening this week, though the movements are relatively modest so far,” Nolan points out.

The energy and utilities sectors led the broader market wider, though again the movements weren’t dramatic.

The Markit iTraxx Europe widened to beyond 100 bp’s earlier this morning, the first time it has hit this level in nearly a month, though a slight decline in the oil price to $106 a barrel helped it recover mid-afternoon.

“Banks and sovereigns were relatively stable today, and it remains to be seen whether the upcoming Irish general election will be overshadowed by events further afield,” Gavan Nolan at Markit Credit Research concludes.

See also: Markit. Chart of the Day

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