Time to buy some peripheral European CDS - As our friends at Kerrisdale Capital point out, "There’s been a lot of talk recently about Hungary following in Greece’s footsteps and potentially defaulting on its debt. Bulgaria and Romania are two other weak economies in Eastern Europe, and the chart below shows bank exposure by country to Bulgaria, Romania, Hungary and Greece. The situation in Greece could make it difficult for Bulgaria and Romania to roll over their debt, an event which would in itself reduce the value of Greece’s assets, creating further difficulty for Bulgaria and Romania."
MarkIt reports Italian CDS has exploded by 50bps, from 200 on Monday to 250bps, a new record. The weakness is spreading globally now. A slightly delayed CMA report indicates that the biggest CDS movers are all sovereigns, and led by Korea and other Asian names. In the meantime eurodollar futures are pushing ever higher, even as Libor is still testing the temporary breaks at 0.53%. All fine and dandy, until you look at Euribor, where things are getting surreal. We will discuss this shortly.
The current system and the global imbalancing act is going to change. The nature of that change is unclear. Comparing similar pasts to the present and extrapolating future effects is one approach. However, such mean reversion doesn’t work along an established time frame. What can be counted on is that unsustainable phenomenon like current account imbalances, negative savings rates, seeming infinite asset price appreciation will change. One way or another, falling savings rates and rising deficits become rising savings and falling deficits.
With regard to risk factors for economic activity, members concurred that, while there were some upside risks such as faster growth in emerging and commodity-exporting economies, there remained downside risks such as the possible consequences of balance-sheet adjustments in the United States and Europe as well as potential changes in firms' medium- to long-term growth expectations. They also agreed that attention should be paid to the effects of various recent international financial developments on Japan's economy, such as increased concerns about sovereign risk and developments in financial regulation and supervision around the globe. - Shirakawa et al.
A look at the relationship between sovereign risk, the price of oil and investment strategy in a possible Financial Crisis 2.0 scenario.
While nothing new to constant Zero Hedge readers, Rosenberg's recap in a few simple paragraphs of what is happening in the European periphery, the EMU, and with sovereign balance sheets is a must read for all recent entrants into fundamental sovereign default analysis.
Why Blaming CDS For The Sovereign Risk Flare Is Idiotic, And Why Gold Is Now A Global Fiat-Currency AlternativeSubmitted by Tyler Durden on 02/05/2010 12:51 -0400
The ever so handsome Tim Backshall of Credit Derivatives Research explains to all rabid anti-CDSites why CDS is the last thing one has to worry about in the spreading sovereign crisis, and why looking at 10% budget deficits (just like Lehman's $50 billion underwater balance sheet was responsible for the firm's bankruptcy, instead of unfounded speculation that naked shorting was the cause) may be the actual reason why half of Europe will soon have to be bailed out. CDS are merely instruments to express a view. And if Joe Cassano found a job somewhere where he is the party responsible for selling tens of billions in gross sovereign notional, then so be it. That said, bailing out the seller of Greek, or any other nation's, protection will hopefully not become an issue all too soon. Alas, the rumor that this seller may be Goldman Sachs (that BS about Greek banks selling Greek CDS causes 5 minute bouts of hypoxia-inducing guffawing in every CDS trader in the business) may mean that one year from now, when AIG is long forgotten (and defunct), we will be discussing why the Fed bailed out Goldman's Greek exposure at 100 cents on the dollar. Lastly, another point by Backshall - don't sell your gold. Should a full blown fiat contagion take hold, the dollar may go higher, but gold, which can not be printed in the mad dash to prop up the Titanic in its final minutes, will surely not go lower.
The dead cat bounce in the most shorted names is taking some of the recent peripheral high fliers tighter, at the expense of increased widening at the "risk-free" core. We expect much more of this risk transfer from the zone of perceived risk to the heart of Europein the weeks/months to come. Some key levels: HY 600, IG 101, SovX 110., Greece 415, Portugal 225, UK 99.50
Sovereign risk was once again front and center on the minds of investors today. Despite the EU's efforts to 'back' Greece's cost cutting plans, investors remain far less sanguine than Almunia. Greek bonds managed a small 7bps rally relative to Bunds (which widened 2bps) as CDS were around 9bps wider (compressing the basis a little more). Don't read too much into the small rally in bonds (the basis remains wide at 55-60bps and we suspect given the convergence today that some are putting the trade on).
Spreads were mixed in the US with IG unch, HVOL wider, ExHVOL weaker, and HY rallying. IG trades 1.5bps wide (cheap) to its 50d moving average, which is a Z-Score of 0.2s.d.. At 92.25bps, IG has closed tighter on 30 days in the last 282 trading days (JAN09). The last five days have seen IG flat to its 50d moving average.
Dubai - meet Greece. Apparently credit traders appreciate biblical allusions, as Greek Prime Minister George Papandreou "promised" for the third time today that all is good in the debt-stricken country, claiming there is "no way" the country would leave the euro or seek aid from the IMF. Credit's response: Greek CDS surges to an all time high of 327 bps, and the country now represents 24% of SovX risk.
Is The PIIGS Moment Of Fracking Approaching? S&P Joins Sovereign Risk Brigade, Downgrades Greece To BBB+Submitted by Tyler Durden on 12/16/2009 13:46 -0400
More bad news for a troubled Greece. More bad news for a troubled Greece. And all this happening even as finance minister George Papaconstantinou says that Greece "is not banking and not operating under the assumption" that the Hellenic country will be bailed out by its Eurozone neighbors. He has certainly studied the Dick Fuld script well.
The global liquidity rally has legs to run, so don't get too flustered by Dubai's debt woes.
Another indication of how banana equities represent the inverse of the fundamentals they are supposed to track, is today's action in Sovereign CDS: Virtually all the big names are wider between 5 and 10%, with the UK and US moving wider by 10.1% and 8% overnight. What is odd is that EUR denominated US protection is also wider: traditionally this tightens when it moves purely as a function of dollar moves. This means investors are finally approaching the sovereign derisking trade once again. With the US at 27 bps (and 20 bps a few weeks ago when we speculated about this as an attractive hedge entry point), the recent melt up in gold may just be moving over to sovereigns next. In that case, investors will need to reevaluate just how solid US "guarantees" on all asset classes really are. a 20% move in a little over a week does not send a message of reassurance that the Obama admin knows what it is doing any longer. Update: Belgium 8 bps wider to 44 on Dexia news.
Another indication of how banana equities represent the inverse of the fundamentals they are supposed to track, is today's action in Sovereign CDS: Virtually all the big names are wider between 5 and 10%, with the UK and US moving wider by 10.1% and 8% overnight. What is odd is that EUR denominated US protection is also wider: traditionally this tightens when it moves purely as a function of dollar moves. This means investors are finally approaching the sovereign derisking trade once again. With the US at 27 bps (and 20 bps a few weeks ago when we speculated about this as an attractive hedge entry point), the recent melt up in gold may just be moving over to sovereigns next. In that case, investors will need to reevaluate just how solid US "guarantees" on all asset classes really are. a 20% move in a little over a week does not send a message of reassurance that the Obama admin knows what it is doing any longer.
Update: Belgium 8 bps wider to 44 on Dexia news.
The chart below presents the top 20 sovereigns with the largest amount of net CDS (not gross) notional outstanding. Interestingly, Italy and Spain, with their $20.4 billion and $11.1 billion in net notional, have the most net risk exposure, (General Electric, parent of brutally realistic and objective financial news station CNBC is at $11.2 billion). Additionally, the chart demonstrates not just the current spread of any given sovereign's CDS level, but also the phenomenal tightening that has occurred since March 6.
Zero Hedge has written repeatedly in the past about the importance of keeping track of sovereign CDS levels as more and more corporate risk (especially in financials) is being offloaded to the balance sheet of respective sovereign balance sheets. And while pundits may claim these indications are useless as there is no way, no how that the U.S.