Sovereign CDS Update - Bloodbath
Gold mania has now moved to sovereign CDS, where the top 5 names are flying again. Biggest movers are the usual suspects: Dubai, Greece and Latvia. As Zero Hedge has been saying since it hit about 22 bps, CDS on the United States will soon likely see a replay of 2008 action. As of today it traded at 36, 2.5 bps wider. And when this starts really moving, watch out.
Below is a chart of the SovX index, as well as a comprison to its intrinsic value.
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on Wed, 12/09/2009 - 11:37
#157929
Thanks for the list. Qatar! Interesting! I must focus on this one today.
on Wed, 12/09/2009 - 11:40
#157936
Does anyone really think they would get paid in the event of a US sovereign default?
on Wed, 12/09/2009 - 11:50
#157952
Does anyone think there *can* be a US sovereign default?
on Wed, 12/09/2009 - 13:20
#158064
Never .... IMPOSSIBLE.
on Wed, 12/09/2009 - 13:25
#158068
Default-deniers: the U.S. have defaulted twice already. Once in 1933, and again in 1971. We just called it something different. Printing your way out of debt is default, in everything except name.
on Wed, 12/09/2009 - 13:33
#158083
SWR, didn't we get there during the great bust of 1871-73 or 4 as well? Just thinking. Especially since that bust was quite similar in comparative structure to this one. Big real estate bubble, Europe that time and massive speculation in corporate debt instruments, mostly US transportation issuance.... Or am I confused on this one?
on Wed, 12/09/2009 - 14:53
#158175
I don't think there was a sovereign default in the 1870s though I could be wrong. The money supply actually declined when the US went to a de facto "gold standard" and currency was no longer backed by silver.
You are right though; the circumstances then and now are eerily similar. Over-extended investment (speculation) in railroads (then) vs real estate (now) and a series of policy mistakes, failed banks (Jay Cooke & Co. - then; Lehman & Bear Stearns - now) and falling prices along with high unemployment. (14% then; ~10% now)
I never vouch for the accuracy of Wikipedia, but the general idea is probably accurate. http://en.wikipedia.org/wiki/Panic_of_1873
on Wed, 12/09/2009 - 18:42
#158393
ALso with Continentals during Revolutionary War and Greenbacks during Civil War...
on Thu, 12/10/2009 - 15:56
#159391
Looking back, I'm pretty sure that it was a weak dollar, the end of the California gold rush, and the White House's relationship with Goldman Sachs that caused the South to secede from the Union in 1861.
Ulysses S. Grant was a GS banker in their telecom group, and the Bear Stearns flagship hedge fund (managed by Robert E. Lee) went bust with all the other basis traders of the day.
on Wed, 12/09/2009 - 17:52
#158359
Not sure how US can default if it borrows in USD.
on Thu, 12/10/2009 - 04:17
#158738
just because the US is not about to default doesnt mean CDS cannot go wider
on Wed, 12/09/2009 - 12:00
#157965
Really, why is this even measured? It's a boolean operation. The world government is OK or we have anarchy. Does it matter what is in between?
on Wed, 12/09/2009 - 13:18
#158057
Don't forget NAND ... meaning not both.
As in you can't have your cake and eat it too.
on Wed, 12/09/2009 - 12:08
#157979
Most folk I'd reckon play the CDS market for increasing spreads, not for actual insurance against default.
on Wed, 12/09/2009 - 13:19
#158058
S .. you are PRIME. You got it. Sovereigns issuing debt in their own currencies can't go bankrupt. The seller's of the CDS (your JPMs and the like) know that, and so they just take the money and put out stories of potential default. Different with AIG, although at the time they believed that the TBTF entities would never be allowed to go kaput so they could not lose money. Lehman and mark to market accounting changed that.
The problem with Greece is deposit insurance. It exists at the state level not the federal level. So when there will be a run on the banks, there will be a serious run.
A RUN ON THE BANKS DUE TO FEAR OF CREDIBLE DEPOSIT INSURANCE WOULD MEAN THE ECB WOULD HAVE TO FUND THE ENTIRE BANKING SYSTEM WHICH WOULD MEAN EXTENDING 'ALLOWABLE COLLATERAL' TO ANY AND ALL BANK ASSETS INCLUDING THE COPY MACHINES AND THE CARPETS, AS WELL AS ANY INTANGIBLES ON THE BOOKS.
on Wed, 12/09/2009 - 13:30
#158076
not exactly...CDSs were an integral component of synthetic CDOs.
The way this worked was that the originator of a CDS receives payment streams, just like a bondholder would. The enterprising Wall Street wizards decided that they should tranche these streams up and sell those products off as synthetic CDOs. This works great because it's like a bond in reverse except with no initial capital. You get yield based solely on a fiction.
There's an entire synthetic economy out there.
on Wed, 12/09/2009 - 13:36
#158087
Most assuredly. Many trillions of it.
on Wed, 12/09/2009 - 16:07
#158255
But when that fiction suddenly becomes real, the number of contracts to be honored shows to be much higher in size than the underlying, usually several times larger, and the subjects who "wrote" the contract usually did so with the hubris judgement that that event will never become real...and the holders of the contracts never took in account the counterparty risk and realized they are holding a policy from an Insurance Company that cannot pay if the house goes on fire.
That is why is totally foolish to allow someone without a home to take a fire insurance policy on someone else's home...when the fire happens you have a claim for two homes...but just one went up in smoke.
This is EXACTLT the nature of the CDS value exceeding many times the underlying...a proof that regulators and policy setters are just a bunch of retarded children that have been given a pile of box of matches and several jerrycans of gasoline to play with...
on Wed, 12/09/2009 - 13:54
#158119
That would indicate that people don't expect to be paid on a default.
on Wed, 12/09/2009 - 15:56
#158248
I think a big issue here is that soverign CDS, to the best of my understanding, have never been tested in a soverign default situation. So people would expect to be paid, in theory, but the reality of it will only be known after a soverign defaults.
It reminds me of this lil guy from back in the day, portfolio insurance: http://www.fool.com/Features/1997/sp971017CrashAnniversaryFlawedInsurance.htm
on Wed, 12/09/2009 - 12:10
#157980
actually yes...first, USA sovereign risk moves with dollar devaluation fears (priced in EUR remember) as well as real restructuring risk; second, try not to think of this like a corporate default (more like an even that triggers CDS) but expect high recoveries (which would typically be spread positive BUT the devlauation of the dollar in this case would force spreads (in EUR) wider; third, clearing for CDS is coming and in that case there WILL be payment in the event of a default event...
Try not to simply dismiss the idea of a sovereign default in a major developed economy. DTCC data shows that sovereign protection are the largest gross notionals and not just some illiquid corner of the market. This rise in sovereign risk is important (and not a blip) as we are seeing up-in-quality trades in corporates BUT at the same time the very tightest credits widening as this sovereign risk leaks back into corporates.
Take a look at ITRX FINLs Sen-Sub differential widening as European sovereign risk widens...
on Wed, 12/09/2009 - 12:23
#157993
wow, good stuff
on Wed, 12/09/2009 - 13:19
#158059
Link for the canaries:
http://www.cmavision.com/market-data
on Wed, 12/09/2009 - 15:12
#158203
Thanks, that's useful.
on Wed, 12/09/2009 - 21:12
#158505
Greece is the IMF's first target. They are to be the first monetarily conquered vasal. The IMF will target on gold and oil first. Greece has alot of gold but not too much to seem obvious. I wonder if afghanistan is necessary to get the oil plan going.
If you want to watch the screenplay being written. Here it is by Citi's new chief economist.
ttp://www.youtube.com/watch?v=Vf2hdzozjj8
on Wed, 12/09/2009 - 12:53
#158021
Ummmm,... yeah.
What he said!
on Wed, 12/09/2009 - 13:18
#158055
One of the best condensed posts of the past week or two. Impressive. Most impressive. Thank you for this snap shot. Will ya do me a favor a consider choosing a picture so I can more easily discern your observations. Have a great day.
on Wed, 12/09/2009 - 23:03
#158611
Don't listen to this Miles guy Credittrader, he's no Tyler Durden I can assure you. Consider using the Anonymous account. There are a bunch of us out here. We don't believe in branding ourselves with some silly name and avatar.
A username and avatar is the carrot and stick for The Dictator, the one. It's her currency and credit concept. Control is her issue.
We lurk, post, and keep the non-Anonymous crowd in check. Anonymous is where it's at my brother. Clear your cookies and join us.
on Thu, 12/10/2009 - 12:11
#159037
Thanks, for so very much. BTW, thanks for noticing CreditTrader's anonymous bent and for availing of this sties broad use of and support of anonymous speech. Besides, you are assuming that Miles Kendig is just one person and is not a Tyler in semi-retirement. Perhaps those are the reasons you choose to remain anonymous. Your powers of observation and your proclivity for presumption. Besides, page views, not commentary are the currency of trade for site dictators. Thanks for making your contributions.
on Thu, 12/10/2009 - 11:53
#159050
Quit evangelizing for outer darkness. I enjoy seeing regular posters and the insight brought from various backgrounds. Anon pansies are really just cowards - you would rather disrupt dialogue and slither away than post something useful and accept criticism.
on Wed, 12/09/2009 - 14:07
#158135
I think I need a couple semesters of night school to get up to speed with this one.
on Wed, 12/09/2009 - 15:04
#158191
Agreed. Good stuff, credittrader.
on Wed, 12/09/2009 - 12:40
#158010
You don't need a US default to make money on this trade.
on Wed, 12/09/2009 - 13:04
#158032
Many of the CDS contracts that have been written define "default" differently. For some contracts, bumping against Congress's debt limit would be a "default" for the purpose of the contract.
on Wed, 12/09/2009 - 14:27
#158153
I've probably asked a dozen times who you buy credit default swap insurance on the U.S. from, what currency it would pay off in should there be a default, and how a buyer would have any confidence they'd get paid in the event of a default given all the chain reactions that would take place. The next intelligent response I get will be the first.
on Thu, 12/10/2009 - 18:05
#159563
US cds is denominated in Euros as standard. If the US prints its way out the $$$ is devalued vs the euro and your contract is worth more.
You might not get the "final" payout but you get your mark-to-market profits and collateral as margin against this as the end nears.
on Wed, 12/09/2009 - 23:54
#158648
NO. actually, by its very definition, one would not. that said, to actually think that such is possible (at this juncture) is preposterous in and of itself.
on Thu, 12/10/2009 - 04:58
#158750
What if Congress simply lost the stomach to continually raise the debt ceiling? Might that be the soverign default risk? Is it impossible?
on Wed, 12/09/2009 - 11:47
#157947
Thanks :-)
Has the SEC got round to getting access to Markit yet ?
on Wed, 12/09/2009 - 12:04
#157971
Amazing, CDS?? Really??? Don't these people know CDS is a ponzi scheme, didn't we learn anything from AIG??!!
"Insanity: doing the same thing over and over again and expect different results"
Albert Einstein
on Wed, 12/09/2009 - 12:05
#157975
Can Greece buy CDS on itself?
on Wed, 12/09/2009 - 12:15
#157988
Sell a CDS to myself at the ask, buy it at the bid:
Profit on the difference & be 100% hedged!
on Wed, 12/09/2009 - 12:10
#157981
Isn't gold the real CDS on US soveigns?
on Wed, 12/09/2009 - 12:11
#157984
Credit Default Swap: The only way you get paid is if they go FUBAR, but if they go FUBAR, your not going to get paid anyways...
GREATEST Scam EVER!
I've got a tulup i'd like to sell ya, and some great land 'near' the south seas!
on Wed, 12/09/2009 - 12:24
#157995
Read up on your South Sea Bubble--it was a debt to equity ponzi scheme, not land.
on Wed, 12/09/2009 - 13:02
#158029
"but if they go FUBAR, your not going to get paid anyways..."
Why?
Depends on the counterparty and if they have the money.
on Wed, 12/09/2009 - 13:29
#158075
Most CDS payments have been based upon a "credit event" and not in total failure. Further, almost all CDS are traded outside of the subject of the trade. To say you're not going to get paid on a default event for Latvia or Mervyn's because if Latvia or Mervyn's CDS reach a credit event JPM will be beyond help and unable to meet their obligations under the contract makes no sense and would give lie to the billions already paid over the CDS settlements to date.
on Wed, 12/09/2009 - 12:15
#157987
Who is generating these CDS's? Are they OTC? or are they merely manufactured in house and shoved out the door?
So many questions - so few answers!
on Thu, 12/10/2009 - 18:06
#159564
They are bilateral contracts.
Someone wants to buy, someone wants to sell - they trade.
on Wed, 12/09/2009 - 12:34
#158003
Great indication of vib's in the "force field." A major thing to watch. Stay tuned. The revolution will be televised.
on Wed, 12/09/2009 - 12:58
#158023
Question for the assembly:
If UK blows up, do they get ring-fenced (can they be ring-fenced?) or does Ben do more currency swaps?
on Wed, 12/09/2009 - 15:33
#158226
Wish I knew the answer. Hope I don't have to find out. However, my guess (and it's just that) is that if the UK blows up, the US is in b*i*g trouble. Agree with an earlier ZH post (12/3) by Nic Lenoir where he muses the the real canaries in the coal mine for the US are Japan and the UK.
What is interesting to note is the the UK is approx. the 6th or 7th largest economy in the world (http://en.wikipedia.org/wiki/List_of_countries_by_GDP_(nominal)). Then take a look at recent Treasury data on foreign purchases of US long-term securities (http://www.ustreas.gov/tic/snetus.txt), and the UK is normally the second largest purchaser of Treasury bonds behind China. Particularly interesting when many others are net sellers. Makes me wonder even more about the US-UK "special relationship".
on Wed, 12/09/2009 - 13:15
#158052
Any thoughts on Switzerland?
on Wed, 12/09/2009 - 22:18
#158581
Neutral, neutral neutral neutral! Theres a 0bp spread on their CDS, and any time it widens or tightens it just comes back to 0!
on Wed, 12/09/2009 - 13:25
#158071
"Gold mania has now moved to sovereign CDS, where the top 5 names are flying again."
For this CDS ignoramous, please explain.
Is the drop in silver/gold today (SLV & GLD) a repeat of the "flight to safety" trade to the USD?
Seems like the true flight to safety would be to PM's.
on Wed, 12/09/2009 - 13:27
#158073
CDSs on sovereigns are nuts...they aren't going to pay
on Wed, 12/09/2009 - 13:33
#158084
What happens if China defaults on derivatives? Gold Seek has an article speculating they will and there was the other instances where they said they would not pay up. See links..
http://www.bloomberg.com/apps/news?pid=20601087&sid=aYH5edxx8gvc&pos=5
http://news.goldseek.com/RickAckerman/1260255720.php
http://www.economicpolicyjournal.com/2009/09/is-oil-derivatives-default-crisis-just.html
on Wed, 12/09/2009 - 13:48
#158110
What about Ukrain? It is also about to collapse. right?
on Wed, 12/09/2009 - 13:49
#158112
Looks like Ireland has made a major sacrifice on the altar of the international bond markets
Major reductions in civil service pay of maybe close to 10% on average
also significant cuts in social welfare
cuts in capital budget
some populist but necessary tax increases on non -resident passport holders
But I am happy because they took 12cent off the price of a pint of beer.
on Wed, 12/09/2009 - 14:20
#158147
Cheap booze to keep em happy while they eat repetative shit sandwiches imported from the US. Everybody makes sacrifices, even AIG employees; so underpaid.
on Wed, 12/09/2009 - 14:21
#158149
"Gold mania has now moved to sovereign CDS, where the top 5 names are flying again."
For this CDS ignoramous, please explain.
It would seem that an increase in risk of soverign default would cause an increase in Gold/Silver prices. A flight to safety trade.
We are seeing just the opposite today.
on Wed, 12/09/2009 - 14:43
#158164
Closer to home, the state of California ranks among the top 10 higest default probabilities, keeping company with other top tens such as Venezeula, Pakistan, etc. on that list. Err, CA has a default probability higher than Greece http://www.cmavision.com/market-data
on Wed, 12/09/2009 - 15:53
#158245
CA has a default probability higher than Greece
...and probably a larger GDP.
on Wed, 12/09/2009 - 16:57
#158296
Maybe as a New Yorker I can by CDS on my state as were apparently out of money and soon will be the next CA (this according to our blind Gov what a pun there). That way I can maybe break even after all the new taxes and fee's that I will have to pay to make sure the union thugs, state BSacrats communtity organizers, and, bloodsucking failed lawyers (my pet name for pols) can carry on droping hits of acid while the rest of us actually live through this Depression!
on Wed, 12/09/2009 - 14:56
#158178
by the way, where can one find this CDS data online?
on Wed, 12/09/2009 - 19:50
#158444
see above posting a link
on Wed, 12/09/2009 - 19:38
#158432
wouldn't percentage change provide a more interesting view?
on Wed, 12/09/2009 - 19:43
#158438
Thanks ZH! You saved me a trip to another website. This is not going to end well. When EU banks get zapped, US banks follow. Dominoes every freaking where. We hit them last year, they zap us in 2010. Too bad the jerkwaters have scared the shorts out of the market. They will end up with more instability than they had in September 08.
on Thu, 12/10/2009 - 05:13
#158751
What is the CDS spread on Ukraine right now?