That Greek CDS just hit the now meaningless level of 2,050 bps or up 280 bps for the day is now longer relevant: the Greece default is now fully priced in. What however has yet to be priced in is what will happen to liquidity when this now inevitable event does occur. To say that the impact on stocks and the EUR would be disastrous is an understatement. So while stocks are enjoying the worst two day pair of news in years by surging on expectations of yet another Chinese bailout of Greece (because the first two worked so great), here is a snapshot of the FRA-OIS spread we discussed yesterday, and which today hit a 2011 high of 34, since declining modestly to 28. Unless something totally unprecedented appears and manages to once again delay fears of a Greek bankruptcy for another 6 months, this spread will continue making overnight funding for European, and soon US, banks, rather problematic.
True, over the long-term the absolute level is not yet threatening for now, what however is, is that banks have massive levered carry positions in the other direction, and the more this spread contracts as it did through early June, the greater the pain when it unwinds. As such, the 100% widening in the US FRA-OIS over the past few days, is currently generating massive pain across Wall Street trading desks, forcing more unwinds, and so forth in the typical closed loop pattern.