CDS report: Greece and Dubai spark risk aversion

Posted by FT Alphaville on Dec 08 17:55.
Markit’s Gavan Nolan wrote this CDS report

In what is becoming a familiar story sovereigns again drove direction in the financial markets, with nations in Europe and the Middle East causing volatility. The Markit iTraxx Europe index was just under 1bp wider at 81.5bp, a resilient performance given the sell-off in equity markets. The Markit iTraxx Crossover index was 4bp wider at 496bp, while the Markit iTraxx HiVol index did better, tightening by nearly 2bp to trade at 121bp.Greece’s spreads widened significantly yesterday after S&P warned that it could cut the sovereign’s rating to BBB+. They widened even further today when Fitch delivered on its own downgrade promise. The agency cut its rating to BBB+ and kept it on negative outlook, where it has been since the end of October. The rationale for the downgrade was all to familiar to the markets: the country’s ballooning debt burden and doubts about the government’s ability to reduce it. Greece has an unenviable record when it comes to keeping public finances in order. The government is focusing on improving tax revenue collection, a necessary measure but one that should be accompanied by measures to trim is bloated public sector. More volatility can be expected in the coming weeks and months as confidence in the government fluctuates.
The volatility was not confined to the credit and equity markets. The euro fell sharply against the dollar, though a flight to quality into the dollar also contributed to the adjustment. The latter movement was somewhat odd given that Moody’s warned that the US and the UK were more at risk of a downgrade than other AAA-rated countries.
Dubai - remember, the profligate city state in the Middle East - added to the risk aversion. The emirate’s finance minister said today that the restructuring of Dubai World would take longer than the six months previously requested. This not that surprising given the complexity of the company and the untested legal environment. The Moody’s downgrades of DP World and other state-owned - but not state-guaranteed - firms were also expected. But there is some uncertainty over how the restructuring will play out, particularly around the upcoming Nakheel bond, and this could be contributing to the widening.
There was a small tightening bias among single names, with banks underperforming amid concerns over their Dubai exposure. Unsurprisingly, Greek credits such as Hellenic Telecom widened significantly. TNT also widened on news that two funds have taken a 5% stake in the Dutch postal services group. Credit investors have long expected a sale but would prefer one of the US giants - UPS or FedEx - to a private equity group
In North America the Markit CDX IG index was just under 1bp wider at 97.8bp, broadly in line with the stock markets. Widening credits dominated, with consumer sensitive credits suffering after supermarket chain Kroger reported disappointed results. Weak sales from McDonald’s also weighed on the market.