C.M.O. 12.14.2009
Credit Market Overview
December 14, 2009
With sukuk’s sliding down the slippery slope faster than the shushers on the indoor ski slope in Dubai, the world is taking a good hard look at how their neighbors are fairing as the tectonic rumblings continue be felt more than two years after the credit quake that began in July of 2007. Although this might seem like forever it is the geologic equivalent of a nano-second.
Interesting as well that James Grant, author of Grant’s Interest Rate Observer, wrote a piece for Weekend Journal on December 5th titled “Requiem for the Dollar”. That the Buck has bounded off its lows since slightly before the piece was printed does not diminish JG’s argument which was not so much about the dollar’s value in relation to other currencies but that as a currency backed by nothing other than the government’s promise to pay it was nearing the end of its usefulness as a global medium of exchange. Mr. Grant is a big fan of the gold standard.
The probability of default has risen globally since Dubai World asked its lenders for a time out and the rating agencies have been busy issuing opinions on the credit worthiness of the various sovereigns they see at risk, hoping as well, to burnish their image after being party to the bubble blowing leading up to the pop.
The European Commission is in the unenviable position of having three of its members, Greece, Italy and Belgium owing more than 100% of their respective GDP’s and the first member of this ignominious group had it’s long term debt rating cut to BBB+ from A which is the first time in 10 years a country has had a rating lower than A.
Ireland too has suffered the wrath of the raters as S&P cut the Emerald Isle’s credit rating to AA this past June adding that it also had placed a “negative outlook” on the country’s debt as a result of increased costs of propping up the banking sector.
To its credit, however, Ireland recently delivered what was said by many economists to be “the most painful budget in a generation”, cutting E4BN ($6BN) from spending. “Not withstanding the last eight months, we are now on the road to economic recovery”, Brian Lenihan, the Finance Minister said.
Spain’s debt remains AA+ rated but S&P cut its outlook to negative from stable this past week citing a “prolonged period of sub-par” growth and “persistently high fiscal deficits”.
A little closer to home and just “South of the Border” Mexico’s credit rating was lowered by Fitch Ratings to BBB citing the “global economic crisis” and the country’s “declining oil production”.
Not to be left out Moody’s Investor Service warned of clouds on the horizon for the U.S. and U.K. calling them “resilient” versus “resistant” with regard to their AAA creditworthiness. This slightly tainted designation puts them in a group separate from the 15 other AAA sovereigns that maintained their “resistant” rating. The company however also said that “the trajectory of the debt metrics, while unfavorable in the near term, does not currently threaten the ratings” of the U.S. and U.K.
Not necessarily a good week to be a sovereign debt issuer.
Greece’s CDS spreads got as low as 100bps on August 4th but have traded as high as 232 on 12/9 before closing the week at 199bps. The high for the year was reached on 1/20 at 292bps.
Italy CDS’s reached 200bps on 3/6, bottomed on 8/4 at 57bps, hit 96bps on 12/9 and closed Friday at 90bps.
Belgium default protection peaked at 158bps on 2/24, traded down to 30bps on 9/16 and then back up to 51bps on 11/26 before closing Friday at 46bps.
CDS spreads for Ireland reached 396bps on 2/17, 123bps on 10/19, 169bps on 12/9 and closed the week at 155bps.
Spain’s spreads soared as high as 170bps on 2/17, sounded to 55bps on 8/4 and closed Friday at 91bps.
The high, low and close for Mexico were: 494bps on 3/2, 134bps on 9/16 and 142bps on Friday.
For the U.K. the numbers are 175bps on 2/17, 44bps on 9/3 and 78bps on Friday.
Last but definitely not least, Uncle Sam’s spreads: 100bps on 2/24, 20bps on 10/21 and 33bps on Friday.
Enjoy the week.
Jim Delaney
