All You Ever Wanted To Know About The Current Sovereign CDS Market But Were Afraid To Ask: The CDS-Bond Basis, CDS Curve Flattening, Volatility Skews And MoreSubmitted by Tyler Durden on 02/14/2010 14:11 -0400
Now that sovereign CDS traders are about to reprise the role of Jason Bourne, and be hunted by international intelligence agencies just because under the not so wise advice of their prime brokers and preferred CDS salespeople, they dared to buy a minimum amount of $5 million in 5 year CDS of [Spain|Portugal|Greece], it is worthwhile to expose this sovereign CDS "thingy" once and for all. The following BofA research report will introduce not only the basics, but get into some of the more arcane concepts for those who feel that the need to roundhouse Spanish intelligence officers is about to reach boiling point (call it 30-bp spread induced synesthesia).
What's a difference of a Trillion dollars in Spain's reported External Debt mean? It changes the debate from solvency to liquidity. An important difference.
Deconstructing Europe: How A €20 Billion Liquidity Crisis Is Set To Become A €1.6 Trillion Funding CrisisSubmitted by Tyler Durden on 02/09/2010 18:03 -0400
Now that some sort of Greek bailout is imminent, most likely in asset guarantee form, it is high time to evaluate the full impact of Europe's decision to jettison monetary prudence at the expense of patching a crumbling fiscal dam holding back trillions in bad investment decision cockroaches, accumulated over the years. Relying on a presentation by ML's Jeffrey Rosenberg, we observe that by providing loan guarantees to the periphery, the core (Germany/France/Benelux) may have well destabilized the core problem for the Eurozone, namely a whopping €1.6 trillion (that's in euro) in total 2010 financing needs, a number which consists of €400 billion in 2010 bond maturities, €700 billion in rolling short term debt and €530 billion in combined 2010 fiscal deficits. Germany has just taken an acute liquidity crisis in the periphery, and courtesy of action we already saw earlier in Bund rates, has sown the seeds for a funding crisis of none other than the very heart of the Eurozone.
"After not having written at all since early Nov, I am now onto my 3rd note in less than a mth. Apologies for this. But no doubt you will all have figured out that I don't have much value to add whenever the whole world is busy gorging on yet another phase of policymaker sponsored & excess liquidity enabled 'buy fest', which is YET AGAIN designed to fool us into mistaking YET ANOTHER Ponzi Bubble for a real, genuine, sustainable and broad-based economic recovery." Bob Janjuah
The levered assets of the banks in many Euro-sovereign nations easily outstrip those nations' GDP's. So when the nations' banks get in trouble from bad banking practices (and a very large swath have), the nations themselves are helpless in attempting to truly save the banks (and instead only institute a bait and switch wherein private default risk/insolvency potential is swapped for public manifestations of the same).
A look at the relationship between sovereign risk, the price of oil and investment strategy in a possible Financial Crisis 2.0 scenario.
Whether or not large nations actually go bankrupt, one thing is clear . . . Larry Summers, Ben Bernanke, Tim Geithner and their foreign counterparts have failed ...
One of the less-reported events this weekend was the not so secret central banker meeting that is taking place in Sidney Australia. Now that factual details are finally emerging it is appropriate to collect some information tidbits about this shindig which has some claiming is reminiscent of a modern day version of the Jekyll Island meeting.
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.
The key lesson from the ERM crisis of 1992 and the Asian crisis of 1997 is that contagion can emerge quickly and often in unpredictable ways. Unwinding of leveraged positions by distressed market participants, herding behaviour among investors, and loss of liquidity that gives way to general flight to quality can all lead to heightened correlations between markets and, in extremely circumstances, set off a self-filling crisis on a regional/global scale. There have been clear signs over the past week that the distress in the Greek government bond market is increasingly being felt in other euro area countries such as Spain and Portugal. The most likely explanation of this development is the “demonstration effect” – the Greek crisis is likely to have caused investors to re-evaluate the fundamentals of these countries. Spain and Greece may not have strong financial or economic links, but their fundamentals have a lot in common.
The possibility of contagion of the Greek crisis may not end with Spain. There is a presumption among investors that in the worst case scenario (and we are not there yet) the EU will give Greece financial assistance. If this is an isolated event, the effect on the overall public finances of the EU is unlikely to be substantial. However, a bailout of Greece may make aid to other countries in similar situations more likely (moral hazard). A series of open-ended bailouts would not only undermine the fiscal positions of core euro area countries such as Germany and France but, more dangerously, would weaken their political commitment to the continuation of the euro area project.
Doctor Doom is now Doctor Flat, which is how he sees the market in 2010. A 50 second recap of the week's events from this Bloomberg Television interview - the key events will not be a surprise to any Zero Hedge regulars (and even irregulars): sovereign risk, budget deficits, massive slowdown in H2, slumping growth. And an expectation for the S&P to end in the mi 1,000's. Nouriel has now fully abdicated his Chief Pessimist Officer title to Mohamed El-Erian.
At the rate things were going in mid-January, the 30 Year yield was set to blast through the June 09 highs. Amazing what a little equities downturn will get you, as...
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.