Wednesday 24 November 2010

Dominos in Europe - "Get the door. It's Domino's."

Irish banks Sub debt whacked to oblivion:

Allied Irish Banks Plc (SUB) 5 year CDS today: 5108 bps +1237 bps +31.98%

Allied Irish Banks Plc (SNR) 5 year CDS today: 1129 bps +175 bps +18.36%

At the same time, Anglo Irish Bank Corp. investors are forced to take 20 cents on the euro for subordinated debt this week. 20% is the implied recovery rate used to calculate a CDS value on CDS referencing SUB debt (most of the time Lower Tier 2 debt because coupon cannot be deferred).

Irish Banks Senior debt as well is in the turmoil:

"Credit-default swaps on the senior debt of Ireland’s biggest lenders approached records highs. Contracts on Allied Irish Banks Plc climbed 103 to 954.5 while Bank of Ireland Plc jumped 89.9 to 735.7, according to CMA."
As per the above Bloomberg article, contagion is spreading in sick Europe.

"Fears of burden sharing are also being seen in senior bank bonds. The 1 billion euros of senior unsecured floating-rate notes due 2012 issued by Banco Espirito Santo were at 90.8 cents, down from 93.4 on Nov. 4, according to Bloomberg composite prices. Its 500 million euros of senior notes due 2013 were at 83 cents, down from 88.38 on Nov. 4."

Paddy Power the Irish bookmaker is know bigger than Bank of Ireland, founded in 1783. The Irish government will get a majority stake in Bank of Ireland.

Spanish and Portuguese Banks Sub CDS getting crushed:

S&P downgraded Ireland’s credit rating two notches to “A” with a “negative outlook...

Spain 5 year CDS trades at 303 bps today...

Greek 10-year bonds yield 11.93%, compared with 8.96% before the European Union and the IMF agreed to the bail out on the 2nd of May 2010.
For Greece, it will end up in restructuring, no doubt about it.

Markit iTraxx Financial Index of 5 Year credit-default swaps on senior debt rose 12.5 basis points to 163.5 basis points, the biggest increase since June.

As you can see, since the beginning of 2010, insuring Senior Financial debt is more expensive to insure than insuring Senior Corporate debt. It is reflected by the above graph highlighting the relationship between Itraxx Main Europe 5 year CDS and Itraxx Senior Financial 5 Year CDS.

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