Largest Widening CDS Spreads: Guess Who?
OK, Rabobank is in first place and Safeway (UK) is in second and Sweden is in third. However, if you guessed Italy, then you still get a gold star. That’s what has my attention. The 5-Year credit default swap spread for Italy is now at 181 basis point and moving higher as contagion starts to infect other countries in the euro zone.
In December, Win Thin asked: “Is An Italian Downgrade Next?” saying:
Here our thoughts regarding the rumored downgrade of Italy. While we remain negative on the ratings for peripheral euro zone, we don’t think a downgrade of Italy is a sure thing. Its numbers have always been bad, and have in fact stayed remarkably stable during this crisis even as the rest of the periphery blew up. With rating agencies on the warpath, we can’t rule out a downgrade, but the case for a downgrade of Italy isn’t as glaringly obvious as the others in the periphery.
Our sovereign ratings model currently has Italy at A+/A1/A+ vs. actual ratings of A+/Aa2/AA-. Moody’s is most out of line (by two notches) but S&P is on target and Fitch is off by one notch. As a point of reference, the implied ratings for Italy, Ireland, Portugal, and Greece all started out at A+/A1/A+ when we began the model in June 2009. But since then, Italy’s implied rating has remained at A+/A1/A+ even as those for Portugal, Ireland, and Greece have sunk to A-/A3/A-, BBB/Baa2/BBB, and BB/Ba2/BB, respectively.
The downgrade to credit watch negative came this past week, when S&P downgraded Italy to credit watch negative. But since the ratings agencies have been very aggressive in downgrading (to make up for past sins during the housing bubble), we should expect action from Fitch and Moody’s here as well. When the pejorative acronym PIGS was first created, it was supposed to be a moniker for the southern European states (Portugal, Italy, Greece and Spain). However, Italy has done much better than housing-crisis stricken Ireland and so Ireland is now in the periphery instead of Italy. What we need to watch out for is contagion. Italy is the most vulnerable. But Belgium and France are two other weak euro zone credits, which both could face some mild downgrade pressures due to contagion.
Win Thin frames it this way:
With regards to Belgium, we suspect that if there is still no government in Belgium by mid-June, it will likely be downgraded by S&P, which it threatened to do near the start of this year. In other words, it is possible that the next country that gets their rating cut could very well be a core and not a peripheral country. That would certainly get the market’s attention.
Clearly, things are not headed in the right direction in the euro zone.
Source: CMA Market Data