Global " recovery " mirrors in sovereign debt insurance costs

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Mon, 11/02/2009 - 12:17 | 117231 Green Sharts
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Can Cheeky or somebody explain who writes CDS contracts on sovereign defaults and why the buyer has any confidence that they will ultimately be able to pay off in the event of a sovereign default?

Mon, 11/02/2009 - 12:14 | 117227 AR
AR's picture

In-house, it is becoming exceedingly difficult to find short-term cash denominated instruments in any currency which is not subjected to ongoing deterioration (and volatility) due to increasing debt levels (private, public, governmental). It's a serious problem. Good post CB.

Mon, 11/02/2009 - 11:46 | 117205 lovejoy
lovejoy's picture

Thanks Cheeks. I have always wondered about soverign DEBT CDS, because in reality, a sovereign cannot default on debt, except when they hold the debt in a foreign currency or are confined by union such as the European Union. The sovereign central bank can print all the money it needs to pay off the debt. The only problem is that the currency may get killed and hyperinflation may occur. [Although Japan is interesting to watch. It's debt has gone through the roof, but its currency has become stronger and they are still experiencing deflation.] But if the sovereign has borrowed in its own currency, it can never default. Remember this and you earn money on the spread provided you hedge the currency. The problem in the past for all third world countries was that they held their debt in U.S.D., so they could never print enough money to make up for the depreciation of their currency relative to the U.S.D. In turn, Europe is a unique phenomenon. The central bankers of each country have lost the power to support their own economies. They are reliant on the EU central bank telling them what to do. That is why Spain has problems at the moment. It needs to build aggregate demand to keep full emploment, but the Spanish central bank cannot implement a large fiscal support package to help the Spanish economy. It has to rely on Brussels.

Sun, 11/01/2009 - 18:44 | 116814 Artful_Dodger
Artful_Dodger's picture

Good stuff.

I was discussing this same topic earlier with someone from Slovenia. I sent this post to him...

 

 

Sun, 11/01/2009 - 17:54 | 116787 Bubby BankenStein
Bubby BankenStein's picture

I wonder how much CDS was bought @ 12/08 prices, and what those positions are worth now.

Sun, 11/01/2009 - 17:50 | 116781 AN0NYM0US
AN0NYM0US's picture

here's data as of this past Friday Oct 30

 

http://www.cmavision.com/market-data#riskiest

Sun, 11/01/2009 - 17:12 | 116753 deadhead
deadhead's picture

great stuff cheeky.

 

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