European credit spreads jumped wider on Thursday as shares fell, partly on concerns that the credit crisis is not yet over as banks are expected to take additional writedowns for the second quarter.
By 1552 GMT, the Markit investment-grade iTraxx Europe index was at 103.5 basis points, according to Markit data, 8.5 basis points wider versus late on Wednesday. The index exceeded the 100 level for the first time since April. The iTraxx Crossover index, made up of 50 mostly "junk"-rated credits, was 22.5 basis points wider at 527.5 basis points.
"The weak performance of the financial sector is crucial, because it highlights how far we still are from a resolution of the crisis," wrote analysts Philip Gisdakis and Agnes Kitzmueller at UniCredit HVB in a strategy update to investors. Goldman Sachs warned on Thursday that Citigroup Inc may suffer $8.9 billion of writedowns for the quarter as well as possibly a second dividend cut.
Belgian-Dutch financial group Fortis was another drag on the market, saying it would take measures to shore up its finances to the tune of 8 billion euros ($12.5 billion), such as selling new shares and assets and cutting its interim dividend.
Credit default swaps for five-year Fortis debt widened by about 10 basis points to 95 basis points, according to data from Markit, while Fortis shares dropped by around 19 percent. Investors who have already injected about $300 billion in new capital into the banks in the credit crisis have lost a lot of money, the UniCredit analysts found.
"Stock prices of the top 15 capital-raising banks lost 30 percent since the respective issuance date," or about $150 billion in mark-to-market losses on the fresh investments. As more and more investors come around to this opinion, the effect in the credit market will be that "hopes that the crisis could be over soon will be priced out again, leading to higher spreads once more", the report said.
The Markit iTraxx five-year senior financials index widened by about 8 basis points to 95 basis points, a trader said. Pressure on spreads may also be coming as the second quarter nears an end, Kitzmueller said. During the crisis, spreads have typically widened towards the end of each quarter as banks have moved to clean up their balance sheets by selling assets and reducing risk. "A number of banks are struggling with the situation that more and more triggers are getting hit now on CDOs (collateralised debt obligations), especially because last week MBIA and the monolines were downgraded and some CDOs lost their triple-A ratings," Kitzmueller said.
Last week, Moody's Investors Service stripped the insurance arms of Ambac Financial Group and MBIA Inc, the two largest bond insurers, of their Aaa ratings, after Standard & Poor's took the same step earlier this month.
As bond insurers are downgraded, the banks that had bought protection from them in the credit derivatives market are seeing the value of that protection decline and are likely to suffer further writedowns in their quarterly reports.