Ireland and Portugal’s ratings fell a notch last week — at least, according to bond markets. Credit rating agency Moody’s says the bond market-implied ratings of both countries fell from Baa3 to Ba1. Ireland’s CDS-implied ratings also dropped a notch, from Ba3 to B1, though Portugal’s held steady at Ba3. For reference, the countries are currently rated Aa2 and A1 by Moody’s, respectively.
So, an eventful week all ’round for Europe’s peripheral sovereign debt market. Ireland raised €1.5bn in debt markets last week — albeit in exchange for much higher yields and on uncertain auction mechanics. Portugal raised €750m in bonds, less than it had hoped and at higher yields. The ‘good’ news is that Spain — that other European hotspot — appears to have slipped from the market’s (wrathful) focus, while also selling debt last week.
. . . credit investors are differentiating among sovereigns that have been caught up in the debt crisis. A case in point is the difference between the direction in the market implied ratings of Ireland, Portugal, and Spain. At the peak of the crisis in May, Spain and Ireland were trading roughly in line on a CDS-implied basis, although Spain’s bond-implied rating had taken a much larger hit, having started from a higher level (Figure 4). However, while both the bond- and CDS-implied ratings of both Ireland and Portugal have steadily deteriorated since the end of July, those of Spain appear to have begun a leveling-out process in the last several weeks. The same trend can be seen in the CDS-Implied EDF metrics for these sovereigns . . . Spain also issued debt recently, and its issue was well received by investors. It should be noted that the maturity was quite short at twelve and eighteen months, and yields were marginally higher than they were a month ago. However, the market accepted all of this debt as well, and responded with tightening spreads.
Two fundamental factors strike us as noteworthy here. First, on the banking front, the final bill for Ireland’s bank clean up appears to keep growing. While Spain’s will also be large, the fact that some banks have now begun to access the repo market outside Spain through vehicles such as LCH. Clearnet represents an improving trend. Second, despite much protest to the contrary, market rumors of both Ireland and Portugal having to access the IMF or at least the [European Financial Stability Facility] EFSF refuse to go away. If this were to prove true, even if creditors were made whole, they would become junior. This may, rightly or unnecessarily, be spooking the markets and therefore widening spreads.
More on the EFSF in a bit.
Still a risk Ireland will access the EFSF and IMF – Goldman – FT Alphaville
Implied sovereign ratings: UK ranks below China – FT Alphaville