Fresh from Markit — an update on the basis in eurozone peripherals.
Quick explainer –The above chart shows five-year CDS-bond bases for various European countries against the European Central Bank’s Securities Markets Program (SMP) debt purchases. A negative basis suggests the CDS spread is lower than the bond spread. A positive basis means the opposite, and tends to be the norm.
Here’s Markit’s commentary:
Predictably, [this week's] two-day meeting of eurozone finance ministers ended without any indication of consensus on how to approach the sovereign debt crisis. IMF managing director Dominique Strauss-Kahn said the response thus far has been “piecemeal” and called for a “comprehensive” plan to address the fiscal problems. Germany reiterated its opposition to the “E-bond”, a Euro-wide bond, and appears to be adamantly against an increase in the European Financial Stability Fund (EFSF). That leaves the ECB to do the heavy lifting. The central bank has been very active in buying bonds of the peripheral eurozone countries, particularly those of Portugal and Ireland. Last week, the ECB purchased EUR1.965 billion of bonds through its SMP, the highest amount for about five months.
This appears to have had some effect on the CDS-bond basis for the peripherals. The above chart shows the weekly average of the five-year basis since May, alongside the weekly amount of bonds purchased through the SMP. We can see that Portugal’s basis has become more positive since the SMP was ratcheted up, meaning that the asset swap spread on the bond is lower than the equivalent CDS. The ECB doesn’t breakdown its purchases into individual countries but anecdotal evidence and various news reports suggests that the buying last week was concentrated on Portuguese government bonds. This isn’t surprising given that Portugal is widely perceived as the most vulnerable to further contagion.
In other words, it looks like the ECB has either abandoned Ireland at this point (or if it hasn’t, its efforts are having increasingly little effect) and is focusing whole-heartedly on that next point of contagion — Portugal.
Related links:
ECB steps up push to calm markets - FT
Touching negative basis in Ireland – FT Alphaville
If not the ECB, whom? - FT Alphaville