CDS

The CDS market, as always, is prophetic to the dot: after main deriskers in the past two weeks were Spain, Portugal and France, so far the spread blow out in these markets has materialized like a Swiss watch. Which is why Ambrose Evans-Pritchard better be looking at this week's DTCC data, because the credit market is flashing a bright red warning light over his favorite bankrupt country - the UK (incidentally, the week's largest net derisker, just after Goldman Sachs). Second in order of sovereign implosion - Ireland. The British Isles, at least according to CDS traders who time after time prove they have far more sense than their equity equivalents, are about to become a hotbed of credit activity, and not in a good way. The other countries that fill out the top 10 deriskers in the prior week: Brazil, Germany (yeah, failed auctions do that), Argentina (yeah, persistent threat of default does that too), Mexico (yeah, living next to a money printing terrorist does that), Ukraine, Korea, Belgium and China.

Greece 5y CDS now at a meaningless 762bps, which is the highest non-upfront CDS spread for any sovereign. This alone should be enough for another monster day in the decoupled algo-driven US markets. And Portugal is now where Greece was just a few weeks ago: its own CDS just hit 350 bps (40 wider), as its 10 spread widens by 17 bps to 235 bps. While the Greek negative basis is still about 250 bps, Portugal is still less pronounced. We expect the Portuguese basis to hit negative territory soon. According to CMA the biggest wideners are all Spanishand Portuguese entities: Enel SpA at 137.07(+16.04), Banca Monte dei Paschi di Siena SpA (SUB) at 215.22 (+23.25), Banco Popolare SC at 164.46 (+15.67), Banca Monte dei Paschi di Siena SpA at 122.64 (+10.82). As for Greece, it's too late: Germany says country may have to leave the Eurozone, as we suspected was Germany's intention all along.

No, you are not looking at Portugal or Greek CDS. BofA starting to rumble too: CDS hits 163.

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Another glaring example of how broken the Greek funding market is, is the record negative basis spread in Greek 5 Year Cash-CDS, which as of today is almost -200 bps (see below). As a reminder, the basis trade's massive inversion in the days after the Lehman collapse is among the primary reasons for the implosion of Merrill, and the spectacular blow up of Deutsche's prop trading desk. What the primary implication of this observation is that the market is essentially saying that the imminent Greek bankruptcy will likely be in the form of a voluntary restructuring, which will not trigger CDS, although that is not the full story. The risk/return scenario, as Credit Trader points out, is assuming a 200bps upside to bond spreads, or a 400 bps downside to an inline level with the rest of Europe, in essence a 33% chance of a free fall bankruptcy, whose implication would most likely be the collapse of the Eurozone, as the EMU would be defunct if a member country escalates into an uncontrollable bankruptcy.

Forget Greece: the European "subprime" contagion is spreading. The biggest daily movers in CDS land are now not some irrelevant Greek banks which the world has now given up on, but Portuguese Caixa Geral de Depositos, S.A. (+32 bps, 12%), Belgian Fortis NV (+8 bps, 11%) and Spanish Banco de Sabadell SA (+20 bps,8%) and Banco Pastor SA (+23 bps, 7%). But. But. GDP is only 2% of GDP? (more like -5% when EuroStat is done with them). But it's all good - the IMF's Strauss-Kahn, who is always on top of stuff, sees no threat of contagion. Buy the pre-bankruptcy dips. Or is that DIPs?

After France, Spain and Italy were the main net notional movers in the prior week, the fear about the Eurozone continues, only this time spreading increasingly to the core. While the Italy move of over half a billion in net notional increase is not surprising, as many perceive the nation as the next weakest link after Greece and Portugal, the German spike is a little surprising, although less so when one considers the failed 30 year Bund auction yesterday. Other countries that fill out the list of top 10 deriskers in the prior week include Brazil, Russia, Japan, Kazakhstan, Greece (yup, they're back), and the UK, which made the 10th spot, as CDS traders finally focus on arguably the most troubled "developed" country in Europe.

We warned you (here and here). EuroStat reports that the Greek budget was really 13.6% of GDP and the Debt/GDP is more like 115.1%. Greek bond spreads explode to a ridiculous 562 bps on the news, 3 years are at 870, and 5 Year CDS is at 565.

PIIGS investors are following closely the rapidly deteriorating developments in Greece: the latest indication that the EU's botched bluff attempt with Greece is likely to have adverse implications on not just the Mediterranean country but on all other highly leveraged countries are the CDS spreads of Portugal. After blowing out to all time wides in early February, about the same time we first heard that Greece was in essence insolvent, the country's credit risk has been once again slowly creeping higher and today hit a level of 235bps: for all intents and purposes a record. As the risk posture reasserts itself in Europe, America has not looked back even once since the market lows of 2010, which were caused by just these European fallout considerations. Is Europe slowly coming to the same conclusion that Dylan Grice did today? What will take for the US to emerge from its bubble trance of a utopia in which any and every problem can be solved with just more money printing, and a steeper yield curve. For now, the answer is nothing, as consumers get their second wind on mortgage payment and credit card bill defections.

Here is the reason for the surge: all day everyone sold off yen and bought whatever risk assets they could find. The carry trade is back. Risk on. As equities surged higher, all the new found money had to be put somewhere: just as equity indices stormed higher so HY rushed back to the day's highs. Stocks, bonds, who cares - buy it all. In the meantime credit is once again scratching its head at the lemmingness of stocks. Even with Goldman stock rising by $2.50, its CDS was 7 bps... wider! Nothing makes sense anymore. Sell yen, but whatever crap you can still get your hands on. The crappier the better. Obama said so.

CDS traders were prescient in snapping up Greek and Dubai CDS long before anyone else realized the risk these countries are in (well, more like Goldman selling CDS to some very close clients, wink wink). In exchange for figuring out what it took cash bond holders months to understand, these 'speculators' made a lot of money and in the process got branded as quasi-sovereign terrorists. Well, Greece can sleep well: according to the latest DTCC CDS data (for the week ended April 9), CDS specs have completely deserted Greece, which saw the single biggest amount of Net Notional CDS decrease, to just over $8 billion, a reduction of $367 million in the prior week (which means all the widening in Greek spreads is now, and has been, just cash bond sales, precisely what Zero Hedge has claimed all along). CDS traders are now focusing their attention on the one country which has so far slipped under everyone's radar, yet which we disclosed is more on the hook in terms of Southern European exposure than even Germany: France, with $781 billion in total claims. Should Greece topple the PIIGS dominoes, France will implode. And this is precisely what CDS traders are betting on now, taking advantage of absurdly tight France CDS levels. Also, just in case they are wrong on France, Spain and Portugal, not surprisingly, round out the top three names in which Net Notional saw the largest increase. Also not surprisingly, Japan rounds out the top 5 deriskers.

Goldman CDS 42 wider on the day, hits 133. Has about 300 points to go before it surpasses Greece. That said, the vampire squid is suddenly riskier than Russia (130), Brazil (115), Colombia (130), Thailand (115) and Italy (129).
Other fins also broadly wider. We will keep you updated.

Nothing to see here. Go back to buying stocks.

A response to those who want to turn back a clock.

Do you see what happens Larry when you sell CDS on California? You get a Greek-style scapegoating campaign. Cali's State Treasurer Bill Lockyer, exasperated at his impotence to sell $2 billion in GO bonds, has resorted to the last option: sending angry missives and trying to make a media circus out of it. It is now all Goldman's fault that California is bankrupt, just because it dares to make a market in Cali CDS. Ring a bell? It worked miracles for Greece, whose bonds are now tumbling a day after everyone said Greek issues were resolved. Also, we can't wait to uncover, just like in the Greek case, that the biggest buyer of Cali CDS is PIMCO, CalPERS, TCW, Western, Oaktree, or some other California-based fund. Now that would be even funnier than Cali considered a more worthless "asset" than Kazakhstan. At least their potassium deposits are best in region.