credit default swaps (cds)

Do we need a new acronym? It is now more expensive to insure against a Belgian default than it is against an Italian one. The comfortably distant notion adopted by richer European countries of a “eurozone periphery” should be deeply challenged by troubles in Brussels. According to MarkIt data, it now costs $240,000 to insure $10m Belgian debt – nearly five times the cost this time last year.

The “periphery” used to mean the PIIGS – Portugal, Italy, Ireland, Greece and Spain. Increasingly it has been used to mean PIGS – as above but without Italy. But more importantly, perhaps, it meant “somewhere else” to those using the term in the more prosperous north of Europe. The “periphery”, we thought, may be recklessly run or deeply unlucky, but at least it’s somewhere else.

As if that weren’t enough CDS-gloom, the cost of insuring Spanish debt has gone up today, despite China’s pledge Read more

Confirmation that PIGS banks are the riskiest of the stress test batch, according to credit default swap data – just as banks from two of these countries reveal capital-raising plans.

Sort the stress test banks on the column headings below to see for yourself. Markit has kindly provided five-year CDS data for as many banks as possible, plus the year-to-date change (in basis points). (Quick reminder: the higher a CDS spread, the greater the cost to insure against default, i.e. the higher the market-perceived risk. A 300bp spread means it would cost $30,000 to insure $1m.) Read more

The Greek cold has turned into ‘flu, and Portugal has started sneezing.

The Greek government’s cost of debt rose dramatically today, and the cost of insuring that debt rose with it —spectacularly. Greek 1-year credit default swaps are trading (very thinly) at an all-time high of 1000 basis points, according to Markit data; a 57 per cent rise in a day. It now costs €1m to insure €10m 1-year debt. The markets are effectively pricing in a debt restructure within the year. Read more

Not only is Greek and UK debt insurance justifiably pricey, it is adding to the cost of other sovereign debt insurance. This from a fascinating little paper from the Bank of Japan, released today.

Credit default swaps (CDS) offer a form of insurance to lenders against the risk of defaulting borrowers. The quantity of sovereign CDS has grown rapidly in the past year, increasing by 30.8 per cent year-on-year to February, compared with just 0.6 per cent for corporate CDS.

The chart above shows that Greek CDS prices are driven largely by idiosyncratic —i.e. Greek—factors, such as the fiscal deficit. The Portuguese chart, by contrast, is increasingly driven by “other” factors: these are defined as the “spillover effects of an idiosyncratic shock in other countries”. Here, I suspect, that means Greece. So where a chart has a lot of grey on it, that country is likely driving CDS prices for other sovereign debt, especially those that have a lot of light blue. And the main culprits (see other charts after jump): Greece, Japan and the UK. Read more

It’s unclear what is making investors sell Greek debt. It may be the German stance. Yesterday, it seemed Germany wanted Greece to pay market rates for their debt, and now there are mumblings of Bundesbank opposition to the current bail-out plan.

Whatever the explanation, markets view Icelandic debt — think: Icesave woes — as a safer bet than Greek: the cost of insuring Greek sovereign 5-year debt is above its Icelandic equivalent for the second day. So it costs about €460k to insure €10m Greek debt, compared with €410k for Iceland (see chart). Read more

Traders are gossiping about a ban on sovereign credit default swap trading, to avoid a Lehman-like collapse. Quite how such a ban would work is mystifying:

I’m hearing and being asked from a few sources that the CDS markets in the sovereign (Greece, Dubai etc.) nations are going to “banned” from trading to avoid a BSC or LEH like collapse. I personally have no idea if there is any truth to the story but it seems to be just going around in the last half hour. Obviously Greece is on the forefront of traders’ minds. Read more

Someone trading credit default instruments is getting a bad deal.

Governments are riskier than corporates, apparently. The cost of insuring against government default is pricier than the equivalent for companies, if credit default swaps are anything to go by. The news comes hot on the heels of a question posed by Michael Gordon last week: namely, whether government bonds should really be considered risk-free.

This should seem crazy. Governments and companies are not equivalent financial actors. Governments can raise tax, and go to war. But financial products whose value derives from these actors may be similar. This apparent disconnect should act as a warning to those who genuinely want to insure against default. The question is: are you interested in the default of a government/company, or are you just speculating? Read more

$172bn is too big a number to ignore. Marla Singer has trawled through footnotes and found that the Fed may be exposed to European banks via swap agreements made by the banks with failed insurance giant AIG. It’s not definite, but it’s big if it’s true.

The argument runs as follows: (1) European banks arranged swaps with AIG Read more

All eyes on Abu Dhabi: the focus has shifted from the health of companies to the relationships between emirates. On this, the consensus is that Dubai’s oil-rich, older, wiser brother may “ride, but not race” to the rescue. The UAE central bank has offered to make funds available, improving liquidity. But investors want more, ideally a debt guarantee: “This isn’t just a liquidity crisis, it’s a solvency crisis.”

It’s also a confidence crisis. Read more

What connects computer screens, green cars and military power? Rare earth elements, required for the manufacture of many advanced technologies, from hybrid cars to guided missiles. China enjoys 98 per cent of REE production, cornering the market after a single US mine was closed in the mid 1980s. Chinese companies have bought stakes in Australian and Canadian rare earths prospects and have tried unsuccessfully to buy the still idle US facility.

The debt load of Eastern Europe is apparently putting off investors. But there is worse news for rich countries: investors are betting that rich countries will default on their bonds Read more