Sovereign Credit Commentary

European credit markets went into the weekend in a fragile state.

London sovereign credit default swaps traders returned from the extended weekend to a tightening market.

The penultimate week of May started with the sovereign credit markets in risk averse mode. For once it wasn’t Greece that damaged sentiment but the two countries regarded as the safest of the “PIIGS” -- Italy and Spain.

It’s certainly not uncommon to find differences of opinion in the E.U.’s corridors of power. But this week the cracks that had been surfacing intermittently between the two main institutions over the last few months became an open rupture.

It was around this time last year that Greece’s credit spreads were breaking new ground in volatility.

The International Monetary Fund, European Commission and the European Central Bank are often referred to as the “troika” thanks to their joint role in addressing the eurozone debt crisis.

Investors had to digest a negative rating action on one of the biggest G7 countries last week. Standard and Poor’s announced on Wednesday that it had placed Japan’s AA- rating on negative outlook, citing the huge reconstruction costs from the March 11 earthquake and tsunami.

European sovereign credits entered yet another fragile stage last week after rumours of a Greek debt restructuring circulated around the market.

After the recent dramas surrounding Ireland and Portugal, it was just matter of time before the sovereign markets returned to their old favourite ­ Greece.

Fans of basketball are no doubt bemoaning the end of March Madness, particular since the final game was so painfully boring and sloppy to watch. For many fans, an introduction to basketball started with an innocent game of “P-I-G” or “H-O-R-S-E.”

The sovereign credit markets have become accustomed to the European Union over-promising and under-delivering. That much was clear in the market reaction to the disappointing March 24-25 E.U. Summit. Spreads were little moved in the first part of this week; the pessimism was already priced in.

The week ending March 25 was always going to be an important one for the sovereign credit markets.