First Post-Sovereign CDS Extinction Level Rerack

Tyler Durden's picture

Yesterday we pronounced sovereign CDS dead (a proclamation which will soon shift to all corporates now that companies are less risky than countries and the vigilantes refocus their attention, as the ability of the sovereign to onboard any more private sector debt is severely curtailed). The reason: the laughable "determination" that a Greek default and 50% bond write down is not an event of default. Maybe not to ISDA's 15 committee deciders (well 14: Barclays should vote no) but it is to the market. As a result, we have seen not only the biggest tightening in IG since May 2010 (11.3 bps tighter to 114.5), but a complete collapse in the sovereign complex, now that it is obvious that in addition to not being a speculative instrument (naked position will be banned in perpetuity), CDS are no longer even a hedging one. Expect the slow, gradual extinction of sovereign CDS, which will merely make the only possible way to hedge long cash govvie position the old-fashioned one: selling.

                         5Y                     10Y             5/10's
ITALY             413/421  -39       404/418      -13/-3
SPAIN            335/343  -42       321/337      -12/-2
PORTUGAL   1010/1040 -85       770/840     -250/-190
IRELAND        690/720  -65       520/590     -180/-120
GREECE          53/56   -6         53.5/57.5    -0.5/2.5
BELGIUM       255/265  -34       252/266       -6/4
FRANCE        163/167  -23.5     182/192       18/22
AUSTRIA      126/134  -20     142.5/152.5     15/20   
UK                71/75   -11.5        88/94        16/20       
GERMANY      72/76   -11.5        92/98        18/22

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jcaz's picture

Fine by me- one less thing to track.

gojam's picture

I agree. More transparent too.

Sequitur's picture

Given this development, by how many years has the dollar implosion (or U.S. default, take your pick) been accelerated?

Everybodys All American's picture

The CDS market has turned into a scam. No other way to say it.

Ruffcut's picture

Was a designed scam, now turning into a country burner. Corporations that are not global will get absorbed and the global government will seep in thru the big black hole of debt.

TruthHunter's picture

"The CDS market has turned into a scam."


It appears to my limited wit to be insurance under another name.  How much of this stuff

was legal if Insurance law is applied to it?


If the Bank Robber walks up to the bench and gives the judge a special little

handshake, upon which the judge rules that it wasn't robbery, only withdrawal under

duress, what are nonspecial people to do?

Hephasteus's picture

Duress is a fake concept.

There's always force applied to any human contract. It's just a matter of what form and how much.

Selling coke to a coke addict is duress under the law. But making cigarettes more addictive than they occur in nature and taxing it is not duress.

Threatening to blow up your power company is duress but being overcharged and then disconnected is not duress.

It's the same thing as old mayhem laws. Poking a cops eye out is mayhem but chopping a thieves hand off is not mayhem.

The people who make the laws use the most force. And most of their laws involve it being ok for them to use force but not you.

vegas's picture

Exactly right. Remove the ability to hedge and the only other option is outright selling.

Way to go Sovereigns, you just cut off your nose to spite your face. But what should we really expect when clowns are in charge.

Expect higher government interest rates as a result. The bond vigilantes are back, and they will strike with a vengeance.

Lord Welligton's picture

Exactly right. Remove the ability to hedge and the only other option is outright selling.

Work out well with banning short selling.


knukles's picture

Bloody well right, mate.
If I can't short it, and I can't buy a CDS to hedge a credit event driven (as opposed to general broad market event) then the issuers are gonna be paying Big Fucking Coupons to Offset the Risk of Abrogation of Contract Law they just introduced into the system.

Abuse of default swaps aside.
No free lunches.

Unintended Consequences are a Bitch.
And this will be unusually so.

Who the Fuck Do Politicians Think They Are to Demand of Markets?

Joy on Maui's picture

The best way for me to translate the headline the German magazine "Spiegel" ran yesterday would be something like  "For they are only dimly aware of what they are doing".    Meaning the parlimentarians who had just backed Chancellor Merkel on her efforts to create the ESFS.   In many an interview, the men and women representing Germany complained of this being too complex for their level of expertise and the extreme time pressure they were under.   The magazine also complained in general about the "group think" like phenomena made apparent by the recent levels of voting for/against - safety in numbers being a relative concept when it comes to pluralism and true democracy.

The banks always win - until they don't.


Put another way, I really don't think the majority of the people in positions of responsibility in Europe have any clue - and they simply have not been screwed enough to notice.  But they will.

Sequitur's picture

Seriously. Is this the best-named website on the planet, or what?

Kina's picture

So if debt has no insurance with it is it down graded?


How much of sovereign debt do banks have?

Ivanovich's picture

Man, I wish I understood this better.

Village Smithy's picture

Hang in there and keep reading. Eventually it all just becomes crystal clear. No Phd. required.

Hot Apple Pie's picture

Imagine you're buying a car with a bank loan. One of the requirements of the bank will be that you have to have insurance on the car, so they don't lose all their money if it is wrecked. Now imagine that the insurance companies, after a massive pileup on the freeway, decide that any accidents involving multiple vehcles is not actually covered by car insurance.

The cost of car loans will go up dramatically and will require you to put much more money down, because there is now no way for banks to make sure they don't lose their money if you get in a car accident. Any bank with lots of car loans on the books now becomes a lot less valuable, because nobody has any idea if they will ever get paid back or not. Banks might all be tempted to sell their existing car loans for pennies on the dollar just to get some guaranteed money from them.

Europe just declared that insurance is worthless, so why would anyone buy insurance? More importantly, why would anyone invest in something that can't be insured? The only way to be sure you get your money back from your investment now is to sell at the slightest sign of weakness, and that's probably not the result they were looking for.

Killer the Buzzard's picture

Hot Apple Pie, let me amplifiy one point:  Europe COLLUDED WITH ISDA to declare insurance is worthless.

Rhetorical question:  In the race to utter worthlessness between COMEX and ISDA, who wins?

LongSoupLine's picture

Jobless claims revised up (shock!) This week's are 400k+...again.

Yet GDP is 2.5%...with 70+% of said GDP being....the consumer.

Yeah...2.5% is fudged...sure.

Azannoth's picture

Don't expect any1 to shed a tear for them, the old fashioned buying/selling is the only legitimate way to do business

pauhana's picture

I don't feel sorry in the least for any government that has to roll over debt now.  With no CDS, interest rates are going way higher and that will put an effective end to the profligate spending that has been rampant around the world.

tarsubil's picture

What if the government starts buying its debt?

Iceobar's picture

How big is the CDS market? Might need a little Grecian Formula to rid the greys..............;>) 

Smiddywesson's picture

They were raped, but with a knife to their necks, they said ok, so it's all completely voluntary.  No credit default here, move along.

Cassandra Syndrome's picture

This may seem a bit off topic, but the dollar index has plummeted to near 75. All this loose monetary policy around the world to support the insolvent ultimately relies on the world's reserve currency. Seeing that 70 is the magic floor level, how can this be supported in the future?

Jim in MN's picture

I don't know but it's pretty important for oil prices, among other things. 

Village Smithy's picture

Maybe insurance on MBS should be chucked as well.

azusgm's picture

The OCC's quarterly report on derivatives by the big banks should make for some interesting reading soon.

Wonder what the fraudsters will do next.

Comay Mierda's picture

fucking wow

the banks make a shitload issuing CDS

now they say they dont have to pay even if the debt insured is cut by half

i guess they dont have any large off balance sheet derivatives anymore if they can just declare them null and void

FAS will skyrocket

vote_libertarian_party's picture

Question: We always here from the banks how their derivatives positions are always in balance so no risk of blow ups.


Doesn't this make some banks REALLY lopsided now and not in balance?

PaperBear's picture

If only Credit Default Swaps (aka debt insurance) had been properly limited to only being available to the party that extended the piece of credit then we would not have had the $180 BILLION AIG and other debacles.

resaci's picture

50% haircut!  Will they not have to sell SOMETHING to make up for the loss?? Win win, even the losers get to sell into  rising spiking markets.

Jim in MN's picture

The key here is that there is a list of corrupt elite motherfuckers who have a meeting and decide if they LIKE a particular CDS or not.

So the smug arseholes who say they are hedged are if and only if their 'good friends' in the superbank cartel still like them on a given day.

Place your bets accordingly, or accordianly for a more rollicking polka time.

ISDA Europe Committee (yes, THEY vote on whether any event 'counts'):

Voting Dealers
Bank of America / Merrill Lynch
BNP Paribas
Credit Suisse
Deutsche Bank
Goldman Sachs
JPMorgan Chase Bank, N.A.
Morgan Stanley
Société Générale

Voting Non-dealers
BlackRock (Third Term Non-dealer)
BlueMountain Capital (Second Term Non-dealer)
Citadel Investment Group, LLC (First Term Non-dealer)
D.E. Shaw Group (First Term Non-dealer)
Pacific Investment Management Co., LLC (Second Term Non-dealer)

falak pema's picture

The oligarchical banksta scam was shown up last night. The banks backed down and now the "market" clowns are talking down to their Euro  "political" counter parts as being statist shills who don't understand arithmetic. This whole BS argument of false doctors and false thermometers, lke CDS spreads, are make belief in a totally manipulated market. If the politicans juggle, regulate the financial kings like the fuked up ponzi scammers they be, then they can get some sense back to the economy. Markets, which are all powerful, will have to take a back seat; like the Pope did, when Luther said he was an 'indulgent' shill.

Admittedly today, its a case of pot and kettle this banksta-politician stand-off, of thieves falling out. Last time it happened big way, when thieves fell out, was over the issue of global colonial scam; it led to WW1.

Merkozy have avoided the Sarajevo 1914 financial Euro moment; have they avoided the Munich 1938 moment of the global debt ponzi? That may be the future price to pay for avoiding the frying pan today...

Maybe we'll find out prettey fast, at latest,  before 2012 or 2013 is over. Europe cannot kick the can two years if the premises of debt creation/accumulation have not been solved meantime at the very root. Same is true of USA.

AbuSous's picture

If a 50% hair-cut is not default then that shall spell the end of the CDS market (at least for the sovereign bond market), and it shall be reflected in a higher yield on the underlying bonds.

I find it mind boggling the EZ is trying use EFSF as a CDS writer (by insuring the 1st 20% of the bonds), but when it is time to pay; they change the rule of the game and claim that a 50% hair-cut for Greek debt isn’t default because it was not “voluntary hair-cut” .