While we discussed the definitive new world geography last week [6], it appears the CDS market has decided to add a new parallel for us, Germany is now Chile (in terms of 10Y restructuring and devaluation risk). As a reminder, Germany's credit risk has risen by almost 50% in the last 3 months to record highs, and has converged higher towards Europe's GDP-weighted average sovereign risk in the last 2-3 weeks.
[7]
and as a reminder - here is Germany's 10Y CDS (interestingly we rallied modestly today - perhaps on the back of Merkel's restatement that there will be no new aid package - or more risk transfer)...
[8]
The point being that Germany's credit risk has converged over 20bps (quite notably) higher towards the GDP-weighted sovereign risk of Europe in the last 2-3 weeks as belief in the risk-transfer union grows and today, that has reverted by around 10bps (as hope fades we suspect).
[9]
Charts: Bloomberg
h/t Alex Gloy