“A default is not an issue for Greece”, ECB President Jean-Claude Trichet declared this afternoon. The activity in the CDS and government bond market this morning suggested otherwise. Greece‘s CDS spreads reached 470bp at one point, about 60bp wider than yesterday and easily surpassing the record 425bp wide reached in February.
The Markit SovX Western Europe hit 99bp, 8bp wider than yesterday but stopping short of the key 100bp barrier. As usual, the widening in the index was driven by the peripherals. However, the effect of Greece on its fellow stragglers – Portugal, Ireland, Spain and Italy - was modest compared to the turmoil in February. Portugal and Ireland, though widening, are well off their February wides (see chart above). Given the weighting of the peripherals in the Markit SovX WE it is no surprise that the index is some way off the 109bp reached in early February.
So the focus was almost entirely on Greece. The apparently precarious position of its banks added to negative sentiment built up from the country’s funding problems and the disjointed response from eurozone leaders. At these yields deficit reduction is unworkable and it appears that external support will be necessary, though the government continues to insist otherwise. Trichet’s intervention and the confirmation that the ECB will be extending its relaxed collateral rules – essential for Greek banks – stemmed the widening tide and brought spreads back in during the afternoon. Greece’s spreads are now trading around 435bp and the Markit SovX WE is trading at 95bp, with most of the active constituents improving in tandem.
The broader corporate credit markets felt the impact of the sovereign volatility. The Markit iTraxx Europe index was as wide as 84bp earlier today, over 4bp wider than yesterday’s close. But the index came back in with its sovereign sibling this afternoon, and is currently trading at 82.5bp, about 2.5bp wider. The Markit iTraxx Crossover is trading at 433bp, just 3.5bp wider, while the Markit iTraxx HiVol is 1.5bp wider at 120.5bp. It has been evident that the corporate market, though affected by the sovereign oscillations, has proved resilient in comparison to February.
In the single name market credits with exposure to the peripheral eurozone countries, such as Hellenic Telecom and EDP, underperformed. Tightening credits were thin on the ground.
The North American market was not immune to Greece’s problems, the Markit CDX IG index widening earlier in the session. But it recovered most of its losses and is currently trading at 87.5bp, matching yesterday’s close.
Markit’s Gavan Nolan wrote this CDS report