After a weak start, European credit indices finished the day tighter as encouraging news on sovereigns supported spreads. The Markit iTraxx Europe index was trading around 78bp, about 1.5bp tighter than yesterday’s close, while the Markit iTraxx HiVol was 1bp tighter at 117.5bp. The Markit iTraxx Crossover was more in tune with rallying stock markets, tightening by 7bp to trade around 433bp.
The sovereign market engendered optimism in the broader markets, and it wasn’t just from the CDS hotbed of western Europe. Dubai, a story that has faded into the background in recent months, captured the headlines again after the government announced a restructuring for state-owned conglomerate Dubai World. The government will be converting $8.9 billion of its claims on the company into equity and inject a further $1.5 billion in cash to cover working capital and interest payments.
Markit CDS chart for Dubai and Abu Dhabi
Nakheel, the property development division at the heart of Dubai World’s problems, will receive $8 billion in cash and $1.2 billion of the government’s claims will be converted into equity. Crucially, Nakheel bondholders will be repaid in full as long as creditors agree to the proposals. Unsurprisingly, the price of the Nakheel 2011 bond rose dramatically to near-par after the announcement. Dubai’s CDS also rallied, though they gave up some of their gains later in the day. The proposals are positive for the emirate’s credit standing but there is still some uncertainty whether they will be accepted. The government has also lost some credibility due to how they handled the affair.
Greece provided a late fillip after the usual day of conflicting news about its fate. It appears that Germany and France have reached an agreement on an IMF and bilateral aid package for Greece. If true, it marks something of a victory for Angela Merkel, who has been pushing for IMF involvement. Greece’s spreads tightened by about 15bp to trade around 307bp following the news. News that the ECB will retain its relaxed rules for collateral until 2011 also helped. However, given the handling of the Greece issue in recent weeks the markets will be looking for concrete measures, not just warm words.
Markit’s Gavan Nolan wrote this CDS report