The cost of insuring debt issued by the Irish government leapt higher this morning as Europe’s beleaguered credit derivatives traders swallowed hard on last night’s news the Irish state had finally decided to bail out Anglo Irish bank.
Risk premiums for protecting the debt of Spain, Germany, Austria and Ireland against default also all jumped to record highs according to credit default swap data provider CMA. Credit default swaps written on Ireland widened 37bp to 257.2, Germany by 3bp to 54.2, Austria 7bp to 146.5 and Spain 10 bp to 139.7bp (though in later trade Spanish spread came off to around 129bp again). This means for a five-year contract it would cost €257,000 per year to insure €10 million worth of Irish government debt.
Among the companies judged less risky than the Irish state are Tesco – currently trading at 122bp or €122,000 – and Nestle, which is quoted at a 72.50bp.
Markit data however showed a different story with Germany, Austria and Spain all trading below their all-time highs. Traders of sovereign CDS also added the caveat that while spreads had bumped out wider, thin trading volumes meant that these prices should be seen as more indicative of a blow to sentiment than evidence of a stampede of investors rushing to hedge themselves against a EU member blowing up.
Spreads on Anglo-Irish meanwhile tightened 5bp on the news to 481.3bp, with other European banks seeing similar inward movements.
BNP Paribas tightened 2bp to 64bp as rumours circulated European equities trading floors of a possible state-aided shotgun wedding to either Credit Agricole or Societe Generale. Spreads for Soc Gen tightened 2.5bps to 97.57 and Credit Agricole saw the third largest improvement in the Europe index, tightening 5.6bp to 73.33.
“As a minimum [the Anglo-Irish bailout] is further evidence of the blurring between Government and Credit risk”, said Jim Reid, a credit strategist at Deutsche Bank. “But at worst it’s going to lead to fresh worries about how the Irish economy survives this crisis and how they can service their increasing debt burden.”
And while the Anglo Irish bailout makes headlines, Reid argues that the pattern of sovereign nations transferring risk on banks to their own balance sheet will continue for the foreseeable future.
“This spread widening in the Sovereign world is indicative of our view that 2009 will see Governments take on more and more Credit risk around the globe” said Reid. “A run on a Government/FX market is arguably as bigger risk as seeing widespread corporate defaults.”
In the corporate market the Markit iTraxx Europe index of investment grade companies tightened by 5bp to 164bp, while the iTraxx Crossover index of mostly junk rated companies traded down from being over the psychologically important threshold of 1000bp to 988bp, a tightening of 26bp.