Thursday, January 24, 2008

Monoline Bailout?

Credit Market Cheered By Monoline Bailout Plan

By Sarah Oconnor | 24 January 2008

The perceived riskiness of European corporate debt receded on Thursday as the credit market cautiously welcomed news of a possible monoline bailout plan.

In Europe,
the iTraxx Crossover index of mostly junk-rated corporate debt tightened about 34 basis points to 448bp according to UBS prices. This means it now costs €34,000 less than it did on Wednesday to protect €10 million worth of Crossover debt against default over five years.

The rally was driven by reports New York state’s insurance regulator was trying to persuade leading US banks to support the struggling bond insurers. Worries about the sector’s possible collapse— which could trigger systemic problems for the credit markets— sent the Crossover to an all-time high of 530bp on Monday.

Overnight in the US the cost of protecting Ambac and MBIA against default plummeted by over 500 basis points apiece. "This is the first positive piece of news on the monolines for a very long time…the market seems to believe some sort of deal will be struck, whether it’s this or a different one," said Andrea Cicione at BNP Paribas. But he urged caution, stressing that the plan was in the early stages. "Some banks are unwilling to get involved, they would prefer the government to step in," he said. "We’ve seen similar initiatives fail, like the super SIV plan."

Geraud Charpin at UBS agreed. "The good news is that the US authorities have shown that they do not want to see a collapse of the monolines. The bad news is that the banks are the ones asked to provide capital, something they do not have in the first place and therefore need to raise elsewhere," he said in a note. The FT reported overnight that the banks are being asked to contribute up to $15 billion for a rescue plan.

Meanwhile, the cost of protecting Societe Generale’s debt against default tightened by 13 basis points according to BNP Paris prices after the French bank said an "exceptional fraud" by a rogue trader, [[Gee; where have we heard this before?: normxxx]] along with big writedowns, had forced it into an emergency €5.5bn share issue. Analysts said spreads had moved tighter because the one-off hit wasn’t as bad as the rumours circulating the markets on Wednesday had predicted. The bank also wrote down €550 million on its counterparty exposure to monolines, including ACA, Ambac and MBIA [[Hey, it's only OP money!* : normxxx]].

* Other People's



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