Monte clears the air

Italian bank Monte dei Paschi was the strongest performer in a day dominated by central banks and government debt.

Monte dei Paschi has been plagued by losses relating to various derivative deals, many of which only came to light in recent weeks. So, it was welcome that the bank today provided some much-needed clarity on its predicament.

The bank said it will be taking a €730 million charge relating to the three derivatives transactions that have caused so much damage. Fabrizio Viola, Monte dei Paschi's chief executive, confirmed in a conference call that no more unaccounted derivative deals would emerge.

He also said that coupons on certain 'Tier 1' securities would be suspended - a positive development for senior unsecured bondholders.

Monte dei Paschi's spreads tightened 30bps to 575bps following the news. It's worth noting that this time last year the bank's CDS were trading at more or less the same level as the Italian sovereign. Now they are over 300bps wider, an indictment of Monte dei Paschi's particular set of problems and its balance sheet weakness.

Investors in Italy were no doubt keeping an eye on the Monte dei Paschi saga. But they were also no doubt watching Mario Draghi's press conference on Thursday afternoon, a must for market participants across Europe.

The ECB president's monthly gatherings can be less than riveting on occasion, with the bank's leader merely parroting statements from his previous meeting. But today's was more eventful and, at times, somewhat surreal.

Matters took a strange turn when Draghi started to field questions about Ireland's promissory notes and whether a deal had been struck to cancel them or not. Draghi was clearly reluctant to reveal any information and only offered the gnomic observation that the ECB's committee "unanimously took note" of the issue. He then seemed to slip up by acknowledging that there was indeed a debt swap underway.

Shortly after, the Irish government confirmed that an agreement had been reached; the promissory notes will be cancelled and replaced with long-term government bonds. This is a significant positive development for Ireland.

The interest on the promissory notes, which were used to bailout Anglo Irish Bank and Irish Nationwide, was a considerable burden for the Irish people and played a part in forcing the government into the severe austerity pursued in recent years.

The debt schedule will be less onerous and have lower interest costs, which will in turn reduce the country's budget deficit. How the government uses the extra breathing space remains to be seen.

Ireland's CDS tightened 14bps to 186bps after the news was announced, more than 10bps tighter than Spain. The latter country held a successful auction this morning, but it had little impact on the sovereign's spreads, which were steady around 290bps.

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