Portugal

Portugal's central bank vetoed the sale of one of Novo Banco’s non-core business units on Wednesday, arguing it was protecting the rescued lender’s reputation as its own sale progresses.

A landmark ruling this week that Novo Banco has not triggered a credit event will set a precedent for future European government interventions in banks, market participants said, but it could prompt further amendments to the International Swaps and Derivatives Association's (ISDA) credit definitions.

An external review to determine whether a credit event has been triggered on Novo Banco concluded on Monday, with market participants warning ahead of ruling that a disappointing result could undermine the credit default swap market.

Portugal is all but locked out of the capital markets after its yields shot up this week to reach their highest levels since the country exited its bail-out programme in May 2014. Ben Jaglom reports.

Portugal’s 10 year yields have risen while fellow eurozone periphery sovereigns Italy and Spain have staged a moderate rally, with bankers noting that investor fears are focused on Portugal’s political outlook.

The International Swaps and Derivatives Association has extended the deadline for an external review panel to decide whether Novo Banco has triggered a credit event, adding to the protracted deliberations over the Portuguese bank.

Established covered bond investors are often sceptical about conditional pass through deals. The structure allows the maturity of their investments to be extended, perhaps by decades. But they could be safer than long dated bullet deals.

The European Central Bank’s extra haircuts for covered bond repo, which took effect on Monday, could spur issuers to consider using conditional pass through (CPT) structures. The higher ratings issuers can achieve using CPT structures mean lower haircuts.

The Bank of Portugal could compensate Novo Banco bondholders who were written down at the end of last year, as the controversial bail-in comes under further scrutiny.

As a decision on whether Novo Banco has triggered a government intervention credit event heads to external review after weeks of ISDA Determinations Committee wrangling, some market participants are worried that a 'no' will reduce the value of financial credit default swaps, while others warn that a European-only result could open a rift with US contracts.

It has been a big week for the International Swaps and Derivatives Association. The organisation moved to overhaul its credit determinations committee rules and broaden its board representation at the same time as undertaking a widely watched first credit event auction of the year and heading into new territory with a Novo Banco CDS external review.

The Iberian Peninsula was host to a duo of barnstorming sovereign benchmarks this week, but there was no consensus among bankers over whether they signified an appetite for sovereigns at the lower end of the European credit quality spectrum.