Today's Major Market Move: PIIGS Credit Default Swap Jumps 50% in One Day

There's been some very odd behavior in Eurozone credit default swaps lately. Bloomberg provides quotes for a combined PIIGS CDS which I can only assume, since I haven't been able to find more detail anywhere, is a swap that pays off if any one of the 5 PIIGS countries (Portugal, Ireland, Italy, Greece, Spain) defaults on their bonds. This CDS jumped in price by 50% in today's trading session, a massive move.

Click here to go to the live chart.

Now one would logically expect that there would be a proportional move in one or all of the individual countries' CDS. Here's a chart of the 5 Year CDS for Portugal, Ireland, Italy and Spain (we'll get to Greece in a second).

Click here to go to the live chart.

All four of them declined in price today so assuming that all of these quotes are accurate (it's very possible we're dealing with a bad print here), that would mean that there was a ridiculously large jump in the Greek 5 Year CDS. Unfortunately the last time we were able to get anything resembling an accurate quote on the Greek 5 Year was back on Dec12th. Bloomberg has been showing a price of zero for the last few days. But let's go ahead and take a look at the Greek CDS up until the 12th:

Click here to go to the live chart.

If accurate, that chart shows a 100% jump in the Greek 5 Year since the middle of November. This is surprising considering that Greek bondholders and Greece agreed to a 50% write down in October and furthermore, the ISDA ruled that since the agreement was 'voluntary', CDS payouts would not be triggered. So based off of this information, one would expect Greek CDS to be relatively stable. But hold on a second, it turns out that since October, Greece has been negotiating for an even larger write down. From Reuters on Nov 26:

The Greeks are demanding that the new bonds' Net Present Value, -- a measure of the current worth of their future cash flows -- be cut to 25 percent, a second person said, a far harsher measure than a number in the high 40s the banks have in mind.

Banks represented by the IIF agreed to write off the notional value of their Greek bondholdings by 50 percent last month, in a deal to reduce Greece's debt ratio to 120 percent of its Gross Domestic Product by 2020.

I would imagine that this development must be generating significant uncertainty in the markets about the sustainability of the original agreement. As a further complication, it was reported on Wednesday by the Irish Times that the EU and the IMF might withhold the €130 billion rescue package.

Details of a deal agreed in October, in which bondholders accepted to a 50 per cent haircut on the face value of their bonds, have to be wrapped up before the €80 billion first tranche of new funding can be disbursed, a Greek official said. “We expected to complete on the bonds in December, now it’s looking like February,” said one official.

In spite of indications that government negotiators were poised to postpone talks until after the holidays, Charles Dallara, head of the consortium of financial institutions negotiating with the Greek government, said bondholders hoped to resume discussion soon. Negotiators said talks could restart as early as tomorrow in Paris.

As I suggested before, it very well could be that there have been bad quotes for either the PIIGS or Greek CDS, or both. One would've expected a move like this to spill over into other asset classes, but stocks, forex, and commodities have all been rather sanguine the past two days. We should find out at the beginning of next week as to whether or not something big is brewing here or if this is just all smoke and no fire.