Argentina widens on stand-off

Argentina replaced Italy as the credit market's focal point after the country's stand-off with holdout creditors intensified.

The government's lawyer told a US appeals court that Argentina had no intention of paying bondholders who refused to participate in past debt restructurings, even if they are ordered to do so by the court.

A previous ruling by a US judge stated that the holdouts effectively rank pari passu with restructured bondholders, meaning that the holdouts were entitled to full payment on their $1.3bn claim. Argentina's disputes this decision, and its opposition has raised to the prospect of yet another default for the sovereign.

Argentina's five-year CDS widened more than 500bps to 2750bps, the widest level since November. It appears that the markets had become complacent about the possibility of a sovereign default - not so now. If the appeals court rules before the next payment is due to restructured bondholders , scheduled for March 31, then we should get some clarity on the matter. Until then, more volatility can be expected as headlines emerge from the court.

Back in Europe, conditions were fairly calm, particularly in light of the political instability in Italy. Investors may be rediscovering their faith in central banks, with recent dovish comments from Ben Bernanke helping to stem the panic.

But the Italy situation is no nearer being resolved than it was two days ago, and the markets will no doubt see further risk aversion if a government cannot be formed without another election.

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