Risk perceptions on eurozone sovereigns have eased since the turn of the year, but Middle East volatility continues
Credit default swap (CDS) spreads in many peripheral and core eurozone states experienced a slight rise today, but fears of a sovereign default in the region appear to have faded in the early part of 2011.
According to data from financial information provider Markit, the cost of CDS protection on Portuguese debt fell from 500 basis points on January 1 to 424bp by the close yesterday, before increasing slightly to 426bp by 1pm today. Irish CDS spreads narrowed from 609bp at the start of the year to 566bp on February 8, but widened to 588bp today.
Other peripheral sovereigns have also experienced declines over the same period. Italian spreads fell from 236bp on January 1 to 172bp yesterday, while Spanish spreads declined from 347bp to 233bp. Both were virtually unchanged by 1pm today.
Greece also narrowed from 1,052bp to 876bp, and then dropped to 811bp today.
Analysts say the inaugural bond issuance by the European Financial Stability Facility (EFSF) on January 25 has helped ease fears of a default by a peripheral eurozone sovereign. Demand for the issue was strong, with €44.5 billion raised from over 500 investors. The EFSF was set up following an agreement by euro area member states on May 9, 2010, and is designed to provide bailout funds for eurozone states in danger of default.
Risk perceptions have also declined for core eurozone countries. The cost of CDS protection on Belgian debt fell from 220bp on January 1 to 161bp yesterday, before rising to 165bp today. Germany dropped from 58bp at the start of the year to 53bp yesterday, and remained more or less unchanged by 1pm today.
This decline in risk perception has not been replicated in the Middle East, where political turmoil over the past month has caused CDS spreads to jump wildly. In Tunisia, spreads have increased from 114bp on January 1 to 169bp yesterday, and then up further to 176bp today. Egyptian spreads have also widened considerably, from 239bp at the start of the year to 335bp yesterday, and then to 347bp today.