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from Global Investing:

Euro periphery: Lehman-type shock still on cards

The passing of Greek austerity measures is fuelling a rally in peripheral debt today with Italian, Spanish and Portuguese yields falling across the curve.

However, one should not forget that peripheral economies are still under considerable risk of becoming the next Greece -- rising debt and weak economic growth pushing the country to seek a bailout -- as a result of tighter financial conditions.

Take this warning from JP Morgan:

Financial conditions have deteriorated far more in peripheral Europe than in the core. The drag from this on peripheral GDP is akin to that seen following the Lehman crisis.

JP Morgan uses analysis based on quantifying the impact of financial market developments and monetary policy actions on economic activity. The main variables the analysis uses is: the three-month LIBOR rate, the yield on investment grade corporate bonds, the spread of high yield corporates over that of high grade, real equity returns, the change in the real exchange rate and bank lending standards for businesses as reported in loan officer surveys.

According to JP Morgan's calculations, the 838 basis-point rise in the peripheral HY spreads implies a drag of -2.2 percent of GDP relative to what it would otherwise have been, had the HY spread unchanged.

from Commentaries:

A limit to Kraft’s sweet tooth

Cadbury's swift rejection of Kraft's $16.7 billion offer has set off widespread speculation that Kraft will bump up its bid to ensure that it becomes king of candy land.

There is a limit, however, to how much Kraft can pay if it is committed to its investment-grade ratings. The company's ratings sit two to four notches above speculative, or junk, territory, and every dollop of extra debt to pay for the acquisition would pressure the company's ratings, making this and future financing much more expensive.

During the last merger and acquisition boom, ratings often became secondary for many firms, since the difference in the cost of financing for investment-grade companies and junk-rated companies had narrowed.

The credit crisis and the re-pricing of risk, however, mean the consequences of losing a sterling credit rating is much greater.

Risk premiums for BBB-rated debt for example, stood at 313 basis points on average over comparable Treasuries while BB-rated junk debt sat at 568 basis points last week, according to Standard & Poor's. In January 2007, the difference between these two categories was 68 basis points.

Moody's Investors Service warned on Tuesday that it could downgrade Kraft's ratings one notch should a deal be consummated.

This is something that Lazard, Kraft's lead financial adviser, and Citigroup and Deutsche Bank who will arrange the financing, will have to take into consideration when formulating a sweetened bid.