Posts Tagged ‘Société Générale’

     

 

 

The EU Summit Agrees on the Well-Intentioned, but Ultimately Meaningless and Unenforceable 'Fiscal Compact'

The Czechs and Brits seem to be the only ones who can clearly see where the HMS EU Titanic is now heading. Or let us rather put it this way: they are perhaps not the only ones who can see where it is heading (toward the proverbial iceberg),  but they have turned out to be the only ones who – for now anyway – refuse to take part in this perilous journey.

We are slightly surprised that not more of the former Eastern European command economies have jumped ship. After all, the path the EU is now on – toward increased centralization and rule by faceless bureaucrats with little democratic accountability – is fatally reminiscent of the organization they once were involuntary members of, the COMECON of yore (Совет экономической взаимопомощи, pronounced: 'soviet ekonomicheskoy vsaymopomoshchi' – the 'Council for Mutual Economic Assistance').

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Fitch Strikes Again

Following on the heels of the recent euro area downgrades by S&P, Fitch has now also issued several new downgrades. While this has not been unexpected, it further complicates the efforts to bring the crisis under control. Of course one must always keep in mind that these downgrades are only belated confirmations of what the markets have long ago recognized and priced in already. The only new problems raised by such downgrades come from indexation and the rules governing the fiduciary responsibilities of certain institutional investors. Investors who allocate their bond investments by the weightings that such bonds have in bond indexes are forced to sell bonds that are removed from indexes due to rating changes – this is one of the effects currently plaguing Portugal's bond market.

This in turn then forces clearing firms such as LCH Clearnet to alter the margin respectively haircut requirements of the bonds concerned in repo transactions, if their spread over the benchmark (a mixture of several AAA rated euro area government bonds) increases beyond a certain minimum threshold.

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Credit Market Watch, January 26

Below is our customary collection of charts updating the usual suspects: CDS spreads, bond yields, euro basis swaps and a few other charts. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Wednesday's close.

While most moves in these markets have been rather unremarkable lately, one must keep a close eye on what is happening in view of the chock-full 'event calendar' in the euro area over coming weeks.

Most euro area sovereign CDS and bond yields  have seen a little bounce yesterday, but the most notable moves are still occurring in CDS and yields on Portuguese government debt. As mentioned yesterday, Portugal is now clearly in the market's crosshairs. This is partly a result of the Greek debt fiasco, but mostly it is due to the somewhat belated realization that even in the wake of recent economic reforms, Portugal will simply not be able to cope with its debt as envisaged in the original bailout package. 

Portugal's prime minister has pleaded for more time: if only the markets would give him time, or the EU somehow arranged to give him enough time, all would be well. Alas, time is in short supply these days. The markets no longer believe it will make a difference. In fact, the belief is probably that over time, things are bound to still get worse, given the recent economic downturn.

As laudable as for instance Portugal's recent labor market reforms are, they have been put in place a year or two too late.

 

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Credit Markets Chart Update, January 25

Below is our customary collection of charts updating the usual suspects: CDS spreads, bond yields, euro basis swaps and several other charts. Charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). CDS prices are as of Tuesday's close, except yields and basis swaps which are as of today.

Credit conditions in euro-land continue to ease across the board, with the notable exception of Portugal.

Also, one of the Middle Eastern CDS spreads that have broken out recently continues to march higher, namely CDS on Bahrain. Bahrain is under Sunni rule, but has a Shi'ite majority population. This could create complications in the context with the recent confrontation between the West and Iran.

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Goodbye, Upbeat Tone?

After the S&P downgrade of nine euro area sovereigns late last week and the fact that Greece's debt negotiations have stalled, Reuters reports today on the sudden absence the more optimistic tone that followed recent successful debt auctions and falling yields for Italy and Spain.

 

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Armageddon Averted? Not So Fast.

Mario Draghi was eager yesterday to point out that the measures taken by the ECB have 'avoided an imminent credit crunch' in the euro area and pointed to the decline in various government bond yields as a measure of success.

Italy sold € 12 billion of bills yesterday, at the upper end of the target range and at a far better yield than on occasion of the last sale, seemingly underscoring Draghi's assertions.

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Euro Area Credit Market Charts

Below is our customary collection updates of the usual suspects: CDS spreads, bond yields, euro basis swaps and several other charts. Both charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). CDS prices are as of Friday's close, bond yields and basis swaps  are as of today's close (Bloomberg updates of CDS are always a bit late).

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Moody's Gets Sentimental Over Austria

The normally hard-hitting credit rating agency Moody's, widely despised and feared among governments in the euro area, just reaffirmed the 'AAA' rating of  the 'island of the blessed' as it is ironically known among its inhabitants, the picturesque Socialist Republic of Austria. Moody's has it right insofar as it can of course never be said that there is a crisis in Austria as long as the supply of 'Mozartkugeln' remains secure.

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Euro Area Credit Market Charts

Further below is our customary collection of CDS prices, bond yields, euro basis swaps and several other charts. Both charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Friday's close.

Friday saw some improvement in Spain's bond yields, and a slight rise in Italy's. These are currently probably the most important government bond yields in the world. CDS on Spain and Italy have come in a bit as well, but at 419 and 542 basis points respectively remain uncomfortably elevated.  Yields on the  bonds of the euro area's 'AAA club' generally improved strongly last week, in spite of the rising probability of ratings downgrades (see Austrian yields below as an example, French 10 year yields also declined by about 30 basis points last week). Euro basis swaps improved strongly.

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Another Bad Auction

Yesterday, Italy held an auction of five year bonds that contrary to Spain's auction on Tuesday went far less smoothly. Although the range of the amount to be sold was picked to be very small – only €2 to € 3 billion – and the amount sold came in at the top end of this range, Italy once again had to pay a new euro-era record high in yields.

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Selling the 'Crown Jewels'

Bloomberg had an interesting report on the actions taken by euro area banks to bring their leverage down and meet the new tougher capital requirements. Apparently the banks are mainly selling foreign assets and due to the current negative market conditions are forced to sell the very assets that are their best performing ones. This will ultimately leave them considerably weaker, as the remaining assets on their books are by necessity of much lower quality.

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Euro Area Credit Market Charts Update

Below is our customary collection of CDS prices, bond yields, euro basis swaps and several other charts. Both charts and price scales are color coded (readers should keep the different scales in mind when assessing 4-in-1 charts). Prices are as of Monday's close.  

As we noted in yesterday's update, markets were expressing severe disappointment on Monday as various assessments of the latest euro area deal began to trickle in. Consequently, there were big moves higher in CDS prices and bond yields.

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