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Spain And Italy Bonds Are Pricing In "Anti-Contagion"

Tyler Durden's picture




 

Even as the probability of a Greek exit from the euro approaches even money, credit markets have, like the children of Hamelin, been hypnotized by the sweet sound of the ECB’s printing press which Pied Piper Draghi has promised to keep humming until at least a trillion new euros have been minted. So far, the overwhelming temptation to front-run this latest tsunami of CB liquidity has driven euro IG spreads to record lows (with IG cash significantly outperforming CDS during last week’s turmoil) which, in turn, has herded investors into higher yielding credit (Xover/Main spread ratio at its lowest level in months).

Even if the ECB’s decision to join the global QE cabal is enough to keep a lid on things outside of GGBs and the hemorrhaging Greek banking sector, promises of debt monetization will be utterly insufficient to allay the market’s fears if the Syriza “virus” does indeed spread beyond the Aegean to larger, more consequential member nations. Of course, this has already happened in Spain where Podemos and its leader Pablo Iglesias have pledged to restructure some $1.1 trillion in Spanish debt. Needless to say, this isn’t the type of rhetoric the sovereign debt market likes to hear and analysts are already speculating on how far yields will rise in the event Podemos’ popularity persists.

From Bloomberg:

Pablo Iglesias’s pledge to restructure $1.1 trillion of Spain’s debt could make investors more cautious about the nation’s bonds, a survey showed.

 

The rising popularity of Iglesias’s anti-austerity Podemos party could mean Spain pays an extra 50 basis points on securities maturing in ten years, according to the median estimate of nine economists surveyed by Bloomberg News.

 

“In case of a Podemos clear victory, the 10-year-spread between bonos and bund may increase as much as 50 basis points,” said Jean-Louis Mourier, an economist at Aurel BGC in Paris, referring to Spanish and German securities. “If a debate emerges about a possible repudiation of part of the Spanish debt, tensions would be more intense on the short or medium part of the yield curve.”

This may be understating the case. Whereas Greece accounts for a mere 2% of eurozone GDP, Spain clocks in at around 11%, and as we saw in the summer of 2012, once yields on Spanish 10s start approaching the point of no return (i.e. 7%), all bets are officially off.

The critical point though, is that a deterioration in the market for Spanish sovereign debt would likely have a severe and immediate knock-on effect. Why? Because IG credit tends to track the big peripherals (especially Spain), not Greece.

From Barclays:

The other channel for contagion, and in our view the more systemically important one for credit markets as a whole, would be the return of re-denomination risk. Specifically, if markets start pricing an increased risk that other member states would exit the currency union (which seems likely, at least to some degree), then the risks … may no longer be ‘contained’. Corporate and bank exposures to Spain, Italy and the other European economies are clearly much more material. Throughout the euro area crisis, credit spreads were more closely correlated to the performance of Spain and Italy than to Greece and we expect this to continue.

Indeed, the correlation between euro IG credit and Spanish yields shows just how important the political situation in Spain truly is:

And although ECB front-running has kept Spanish and Italian spreads compressed…

...the contagion risk is very real.

Here’s Barclays again:

...politics could be a transmission channel and countries such as Spain could suffer from contagion despite its robust economic recovery, unless support for (Syriza-like) Podemos diminishes in the face of Greek hardship in the aftermath of an exit.

The icing on the cake: CDS spreads for Spain and Italy are trading far tighter than they should be even if we assume no Grexit!

It turns out that the next best thing to Greek contagion in this bizarro, centrally-planned world is... anti-contagion.

 

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Thu, 02/19/2015 - 15:05 | 5804515 farmboy
farmboy's picture

Simply the weight of trillions of fake money that must be invested at any costs

Thu, 02/19/2015 - 15:12 | 5804542 kaiserhoff
kaiserhoff's picture

Squeezing ze balloon.

Tre chic.

Thu, 02/19/2015 - 15:15 | 5804582 flacon
flacon's picture

I am "this close" to joining the stupid train and making a fortune instead of becoming poor by remining "intelligent". Maybe that's the most intelligent strategy one can take...

Thu, 02/19/2015 - 15:30 | 5804672 farmboy
farmboy's picture

Me too but I refuse. Just go fishing or so have a live and not get involved in "financial market"

Good luck

 

Thu, 02/19/2015 - 15:35 | 5804713 zeropain
zeropain's picture

another choice is to stay out of a stupid fight and see who is left standing 

Thu, 02/19/2015 - 17:03 | 5805120 Dr.Vannostrand
Dr.Vannostrand's picture

Hey Zeropain - 

Wanted to say thank you for a comment you made last week regarding success and failure. At a turning point in my life at the moment and that comment is up on my refrigerator. It really inspired me. Appreciate you thoughtfulness. 

Thu, 02/19/2015 - 17:24 | 5805235 zeropain
zeropain's picture

Cool

Thu, 02/19/2015 - 16:16 | 5804911 Uber Vandal
Uber Vandal's picture

The only problem with getting on the stupid train is knowing when to get off of the stupid train, or if one got a into the Hotel California Parlor Car.

Personally, there are many more trains to catch, I will wait until this one crashes and catch the next one.

Thu, 02/19/2015 - 16:28 | 5804959 The Wizard
The Wizard's picture

"Simply the weight of trillions of fake money that must be invested at any costs"

Invested to cover toxic derivatives with the yoke around the people's necks.

Thu, 02/19/2015 - 15:07 | 5804526 kaiserhoff
kaiserhoff's picture

A Buddy of mine lived in Spain for a few years while they still used Pesos.

Yo hablo solamente un poco de espanol, but that and a few Yankee dollars could be fun.

Thu, 02/19/2015 - 15:07 | 5804528 mattgallis
mattgallis's picture

Another post about Europe. How OG of you!

Thu, 02/19/2015 - 15:11 | 5804552 KnuckleDragger-X
KnuckleDragger-X's picture

People enjoying watching a good train wreck and this one should be a dandy....

Thu, 02/19/2015 - 15:24 | 5804629 mattgallis
mattgallis's picture

The train-wreck occured 5-years ago, this is just a boring soap opera re-run :-/

Thu, 02/19/2015 - 15:10 | 5804547 NDXTrader
NDXTrader's picture

All about public consumption. I just wish they would kick this can down the road so we would quit making new highs to show how confident we are

Thu, 02/19/2015 - 15:10 | 5804548 Yen Cross
Yen Cross's picture

 I'm telling ya Tyler. Draghi is going to go " Full Krugman" in March.

 He'll say that higher(EU soveriegn) yields were signaling deflationary signals. We live in a completely opposite global economy.

 When rising rates are the catalyst for CB printing,  and confidence in growth is lost, just print MOAR.

Thu, 02/19/2015 - 15:13 | 5804566 KnuckleDragger-X
KnuckleDragger-X's picture

When all you have is a hammer, nail everything...

Thu, 02/19/2015 - 15:47 | 5804644 Yen Cross
Yen Cross's picture

 When the Fed. prints they're not perceived as monetizing debt because of the deficite. The deficite has been halved by 40% due to fracking. (energy dependency)  That's why the Fed. has it's hands tied.

. The Fed. can however use various mechanisms to monetize ECB debt issuance. EuroClear,Belgium>third party intermediaries, U.S banking arms of European banks, Sovereign Funds, BIS, Ect;

 I have a real problem with interest paid on these overnight excess reserves, these financial entities park at the N.Y. Fed. every night.

  It's TABOO at the Fed. as well. The Fed is basically operating a negative interest environment.( paying interest on funds they lend at a lower rate)

 Draghi doesn't have any colateral to buy, other than bonds. The Fed. is indirectly monetizing debt through the ECB.

Thu, 02/19/2015 - 15:15 | 5804583 Dungholio
Dungholio's picture

Markets look very attractive here... waiting for todays vixnado to begin...

Thu, 02/19/2015 - 15:17 | 5804589 ebworthen
ebworthen's picture

We all just need to default.

It is the only way to break the shackles of the parasite banking class.

We need to be Men not mice, human beings not cattle.

Thu, 02/19/2015 - 15:18 | 5804595 bbq on whitehou...
bbq on whitehouse lawn's picture

Its almost as if it as a plan to remove Greece and keep paying everyone else to keep quite about it.
A lesson that Governments are the important part of any economy. Not that Governments take an important part of every economy.

Thu, 02/19/2015 - 15:18 | 5804598 Raoul_Luke
Raoul_Luke's picture

"Robust" economic recovery of Spain???  I don't think robust means what you think it means.

Thu, 02/19/2015 - 15:20 | 5804611 surf0766
surf0766's picture

"Spain could suffer from contagion despite its robust economic recovery"   NOT

Thu, 02/19/2015 - 15:43 | 5804758 ebworthen
ebworthen's picture

LOL - yes, you know you are down the rabbit hole when the only recovery is in the repeated use of the word.

Thu, 02/19/2015 - 15:26 | 5804636 unionbroker
unionbroker's picture

Im thlnking if im a greek living in poverty and looking at the americans spending a trillion more than they make each year why dont we just quit the euro and print ourselves into prosperity since it seems to work everywhere else

Thu, 02/19/2015 - 15:29 | 5804659 Rip van Wrinkle
Rip van Wrinkle's picture

"....in the event Podemos’ popularity persists."

 

Now that is something you can take to the bank.

Thu, 02/19/2015 - 15:49 | 5804792 Spungo
Spungo's picture

When your only tool is a hammer, you'll have a strange desire to fuck the world's financial system.

Thu, 02/19/2015 - 15:50 | 5804796 barry2001
barry2001's picture

If you are into drones check out this site http://pickyourdrone.com/

Thu, 02/19/2015 - 15:51 | 5804800 HardlyZero
HardlyZero's picture

Today and yesterday...it's like a Dow pattern (over a few hours) to elicit a reaction...a Dow Rorschach test...I see a repeating pattern.

The repeat (or echo) pattern is a different size, but it occurs twice or three times each day.

Someone has been trying to get buyers into the market by eliciting our animal spirits !

Wow.

Thu, 02/19/2015 - 17:35 | 5805284 Son of Captain Nemo
Son of Captain Nemo's picture

You know at some point the more shit that you read "like this" you become more inclined to just "give up"!

Case in point the number of comment(s) on this "Twilight Zone" read about "anti-contagion" bonds today 02/19/2015 versus 02/19/2009!  Had you put something like this out there even a year ago I bet the number of hits would have been in the hundred(s)!!!

"Now"?!!!

P.S.

Just to demonstrate how bad it's gotten... I use to dismiss this guy when I had dark hair at the temples as a "nut".  Now say that with everything you are witnessing this government doing at home and abroad that what he's been saying for years now is a fraud?!!!

If you want to change it while there is still time left, it's probably not a bad idea to take some risk(s) and screw the potential consequences of your own actions before you have none left to take!!!

Do NOT follow this link or you will be banned from the site!