2012 has been a year in which investors have become much more comfortable with sovereign debt. Below is a snapshot showing credit default swap (CDS) prices for the sovereign debt of 42 countries around the world. As shown, only one country saw its default risk increase in 2012 — Argentina. Six countries saw default risk fall by more than 70%, and they are all European countries. And while the US still has low default risk compared to the rest of the world, it only fell 16% in 2012, which ranks it fourth worst on the list. The Fiscal Cliff looms large.
Posts Tagged: default risk
It’s been awhile since we last posted on sovereign default risk in the form of credit default swaps, so below we take a look at how risk has changed over the past few months for 59 countries around the world. For each country, we highlight the current price (in basis points) of 5-year credit default swaps on its sovereign debt along with the price and date of its 6-month high in default risk. As an example, a country with a 5-year CDS price of 100 means that it costs $100 per year to insure $10,000 worth of that country’s debt for five years. >> Read More
Prepare For Europe Collapse Before New Year
The European Central Bank needs to act now in order to avert a potential default by a nation like Spain or Italy, Citigroup Inc.’s (C) chief economist told Bloomberg Television on Wednesday.
“Time is running out fast,” Willem Buiter said in an interview. “I think we have maybe a few months–it could be weeks, it could even be days–before there is a material risk of a fundamentally unnecessary default by a country like Spain or Italy, which will be a financial catastrophe dragging down the European banking system and North America with it.”
Other than increasing the size of the European Financial Stability Facility, which would be difficult for political reasons, Buiter added, “the only remaining show is the ECB, and they may have to hold their noses while they do it, and if they don’t do it, it’s the end of the euro zone.”
Well, it is not just the CDS ban, the fact that Greece is now done is also a modest factor, but since nobody can short Greek default risk unhedged, the only option is to short the bonds. As they did today en masse. Greek 1 Year bonds: the most liquid proxy for default in the absence of 1 Year CDS, closed at 183%, after hitting an all time high of 188%, following yesterday’s 173% close. To all those who bought 1 Year Greek bonds when yields hit 100% a month ago because “they just couldn’t possibly drop any more, and you would double your money in one year guaranteed”, condolences for the 50% loss. We are certain that a new batch of bottom callers will emerge, this time calling for doubling your money in six months…. Then three.. Then one and a half… etc… Until finally Zeno’s paradox catches up and you either double your money overnight or you lose it all.
While all eyes this morning are on Chinese CDS (with about an 18 month delay: about par for a centrally planned market), which has finally blown out, the shifting of attention has done nothing to fix the situation in Europe, where CDS is once again wider across the board.
Update: sure enough, here is Ambrose Evans-Pritchard with his own perspective on just this topic, which is oddly comparable to Zero Hedge’s: “Mrs Merkel’s aides say she is facing “war on every front”. The next month will decide her future, Germany’s destiny, and the fate of monetary union.”
Every time we discuss the futility of the nth bailout of [Greece\PIIGS\Europe\the Euro] we make it all too clear (most recently here and here) that the trade off between Germany onboarding ever more peripheral financial risk in one after another all too brief attempt to prevent the implosion of European capital markets and its currency, is not only a relentless creep higher in German default risk (and lower in the German stock market, as August has so violently demonstrated) but increasing political discontent, which after claiming countless political regimes across the world, has finally settled down on one that truly matters: that of German chancellor Angela Merkel. And as Reuters reports, Merkel’s disappointing response to an ever escalating set of crises, both domestic and international, means that the beginning of her end (and by implication of the Eurozone, and of the Euro) may be as soon as September 23, when the vote over the expansion of the latest and greatest European bailout lynchpin, EFSF, will take place.
To wit: “Germany’s Angela Merkel faces the biggest challenge to her leadership since coming to power in 2005, with traditionally loyal conservative allies openly criticizing her approach to the euro zone crisis and her hands-off Libya policy in shambles….it is Merkel’s piecemeal approach to the euro zone’s worsening debt crisis that has come under fire over the past week and now threatens her iron grip on power in Germany.” The biggest problem for Merkel is that she has gone “Japanese” in the opinion of the public: doing neither nothing, nor enough, to halt the European crisis in its tracks: “For some in Germany, she has gone too farby bailing out stricken euro zone members and agreeing to intervention in the bond markets to prop them up. For others at home and abroad, she has not done enough, shirking bold steps that might solve the debt crisis because they would be unpopular at home.” This latest attempt to placate everyone, while achievingprecisely the opposite, will come to a head on September 23 when the vote to expand the EFSF takes place: she is for the time being expected to have a sufficient number of votes to pass the critical for the eurozone proposal. “If it’s not enough, Merkel would be forced to resign. It would lead to a crisis.” And should there be a crisis, it will be the end for the European experiment as well, since with the political situation at the Euro’s biggest financial backer in flux, the free fall in European risk will be one that no one, certainly not the ECB, will be able to arrest. Cue even more improvised bailouts by the central banker oligarchy, yet without Germany, the credibility of any and all such deseprate measures will be nil. This incremental political uncertainty will likely make the life of the FOMC’s Sept 20-21 meeting slightly easier, as an adverse monetary announcement by the Fed, contrary to that priced in, coupled with the risk of a full blown European crisis, will be very frowned upon by the Status QuoTM.
Seen for much of the past six years as a reliable, steady leader whose competence and knack for brokering deals made up for a lack of bold vision, Merkel’s image has taken a beating over the past months and polls show an increasing number of Germans view her government as directionless. >> Read More
The latest midmarkets:
- MAIN 141.25/142.5 +.75 XOVER 590/593 +10.5
- ITALY -4
- SPAIN -13
- PORT -5
- IRELAND -
- GREECE -
- BELG -2
- FRANCE +2
- AUSTRIA -1
- UK +5
- GERM +4
- SOVX 245/250 -
The default risk is increasingly shifting from the periphery to the core. And while the spreads in the PIIGS will resume widening within a few days, German CDS will not tighten, and in fact as of this morning, German 5 Year CDS is wider than the UK – for the first time since January 2008.
Two words: default risk. And one more word: record. Below is the equivalent of another 1000 words.