Saturday, February 18, 2012

Today's Major Market Move: PIIGS 5 Year CDS Up 26% in February

Overall we've seen risk come off in CDS-land this month. Out of 30 credit default swaps that we track, 26 have declined in price in the month of February. Bucking that trend has been the combined PIIGS CDS which has climbed over 26%. Almost all of that rise is due to Greece since the CDS for Italy, Ireland and Portugal have all declined and Spain's were only up 3.9%. Here's the line chart for the combined PIIGS CDS (aka GIPSI) going back to the end of October 2011:

Click here to go to the live chart.
Even with this month's gains, combined PIIGS default risk is still well off of recent highs. However there's been more and more chatter, much of it rumored to be coming from German finance minister Wolfgang Schauble, that Greece sooner or later is going to have to default. This is "default" in the traditional sense; none of this "voluntary haircut so that we avoid a credit event" type nonsense, which means it would trigger a credit event and the Greek CDS would pay out. Here's some more color from the UK Telegraph courtesy of
The report states that according to unnamed EU officials - German Finance Minister Schauble believes that the austerity measures required to reign in Greece's debt burden are so severe that no government would ever be bale to implement them. According to the UK Telegraph - a secret "Troika" report concluded that even if Greece made good on its promises, it would not be enough to reach the target of bringing total debt to 120% of GDP by 2020. The EZ official was quoted in the article as saying: "He (Schauble) just thinks the Greeks cannot do what needs to be done. And even if by some miracle they did what has been promised, he - and a growing group - are convinced it will not pull Greece out the hole".
To this author it seems that we are closer to a non-negotiated default and possible Eurozone exit for Greece then we have ever been in any time previous to now. So the fact that credit and equity markets are acting so sanguinely is a head-scratcher. With many commodities up over 10% this year, comprehensively the markets appear to be saying that they expect the central banks to open the spigots at any signs of severe distress. Of course one would then also expect interest rates to be climbing higher, which hasn't been happening. "May you live in interesting times" indeed.

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