Credit Markets Update: Iberian credits tighten following IMF's Brazil bail-out

In the bond markets, Spanish and Portuguese names, led by Telefonica, rebounded strongly. The cost of five-year credit protection on Telefonica narrowed over 40 basis points since the IMF announcement and is now trading at 210/225bp. Credit defaults on Spanish energy company Endesa came in 35bp from 170bp-mid to 135bp-mid, and five-year protection on Portugal Telecom came in from 180/200bp to 140/160bp.

Yesterday also saw a big contraction in credit protection spreads for banks with the most exposure to Brazil. Santander Central Hispano five-year senior protection is now trading 20bp tighter having come in from 90/100bp to 70/80bp.

The cost of five-year senior credit protection on Dutch bank ABN Amro - marked as the other major bank with significant exposure to Brazil - also came in from 50/55bp to 37/45bp following the IMF deal. Yesterday, ABN Amro reported what analysts described as a mixed set of results and unveiled a new round of job cuts. But the Brazilian news dominated market sentiment, said one London-based credit derivatives trader.

There were many sellers of protection on these names and spreads could come in further if the Brazil situation continues to look positive, said another London-based trader. “But the economic and political outlook for Brazil remains far from clear, and further crises of confidence could send spreads gapping again rapidly,” he added. Credit rating agency Standard & Poor's said on Thursday it retained a negative outlook on Brazil's ratings despite the IMF loan, saying doubts about the economy linger.

Elsewhere in Europe, volatility in the credit derivatives market remained high in the auto sector. Negative sentiment towards Ford continued to set the tone this week, following speculation of further changes at the top of the world's second largest car maker. Credit protection on Ford Credit was trading at 415bp today, and has widened over 100bp this week. Credit default swaps on General Motors and Fiat were priced at 300bp and 1,000bp, up 100bp and 150bp respectively over the week. Other auto credits, Volkswagon, Daimler Chrysler and BMW, continued to trade at the higher-end of levels seen over the past two weeks.

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