Germany approves Cypriot bailout

There was some relief for Cyprus today as German MPs approved the €10bn of EU/IMF loans to the Cypriot government, giving the green light for the package conceived last month.

The Bundestag confirmed its charitable mood by also agreeing to an extra seven years for Ireland to repay its bailout.

As a result of a growing exposure to weaker EU members and increasing debt-to-GDP ratio, Germany itself was the victim of a credit rating downgrade yesterday by credit rating agency Egan-Jones (downgraded to A from A+).

However no mainstream agencies followed suit and German CDS spreads today took no notice, continuing to trade at 34bps.

Cyprus aside, today was a great day for European sovereigns issuing debt at low yields, considering fundamentals. France auctioned 5-year bonds at a yield of just 0.73%, Spain sold approximately €4.7bn of government debt including 10 year bonds at an average yield of just 4.612% and Slovenia successfully placed €1.1bn at a 4.15% yield after recently only managing to raise only €56m against a €100m target.

CDS spreads on France and Spain remained relatively flat at 76bps and 264bps, respectively, with Slovenian spreads widening slightly from 340bps to 348bps after a good performance yesterday, tightening by 26bps from 366bps.

CDS liquidity on Slovenia deteriorated in recent weeks as reflected in bid/ask spreads calculated as part of the Markit Liquidity product. Markit currently assigns a liquidity score of 3 to Slovenia on a scale of 1 to 5 where 1 is most liquid.

In Italy, lawmakers were today expected to choose the next president to replace Giorgio Napolitano from May 15th, however, the Italian parliament failed to elect a president in the first ballot. CDS spreads reflected a muted negative market reaction, hitting 270bps, up 5bps from yesterday.

Fears of a potential crisis in Portugal faded as the government there approved new spending cuts to put its EU/IMF bailout back on track. CDS spreads on Portugal widened by a further 5bps to 403bps.

Following suit from Goldman Sachs, Morgan Stanley's first-quarter adjusted earnings released today beat estimates. However declines from its trading division concerned investors, causing the stock price to slide and CDS spreads to widen marginally by 3bps to 150bps.

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