Concerns have grown that the Central and East European countries are facing major difficulties, which could have significant spill-over effects to West European banks. Banks have therefore been under pressure and CDS indices are significantly wider. In the US, the Obama administration presented a support plan for the US housing market.
During the week all eyes moved towards East as concerns are growing on the economic outlook for Central and Eastern Europe. A meltdown in Eastern Europe would imply that losses for the banking sector will increase substantially. As most of the banks are owned by banks in Western Europe, the crisis may therefore have spill-over effects. The negative mood came after Moody’s published a report on the risks for Western banks due to their Eastern European exposure. We describe this report further below.
Consequently, credit spreads have had a hard time during the week – especially for banks. The investment grade CDS index, iTraxx Europe, currently trades at 174bp up from 154bp last Friday. The high yield index iTraxx Crossover currently trades at 1085bp up from 1070bp last week. The senior financial index has also widened considerably and now trades at 152bp. As long as sovereign CDS prices are under pressure CDSs on senior bank debt are also likely to suffer as the two are heavily interlinked due to the various state guarantees on bank debt.
