Credit Default Swap Sovereign Wideners: Guess Who?
Here’s my take on the wideners:
- Hungary. The Hungarians are a basket case and the Swiss franc exposure is killing them. Many Hungarian municipalities have debts in francs because it was cheap. Bad move – and this has been going on for a long time. Edward Hugh says the “Hungarian government’s much publicised unorthodox plans to cut the country’s public debt level has been attracting a lot of attention of late”. Indeed, most of the attention is bad.
- Italy. Their yields are exploding. Yet the ECB is doing nothing. Morgan Stanley says fiscal austerity and privatisation come first and that the ECB can step in at any time if need be. Good luck.
- Slovakia. I haven’t heard anything here. They use euros so it can’t be a carry trade thing as it is in Hungary. If anyone knows, please do tell.
- Germany. Interesting. They are part of the euro zone and hence, the Germans are vulnerable too. Still, like Slovakia the default likelihood is low.
- Turkey. Win Thin just noted “Turkey presents a good example of the risks Brazil faces if policy slippage continues, especially in this current environment where investors are not very forgiving of countries making policy mistakes”. People are concerned about capital flight and currency depreciation.
- Belgium. They have no government and a huge debt to GDP. As I have been saying, they are next to join the periphery as the spread to bunds is already over 200 basis points
- UK. Interesting. Default risk also low as it is in Germany, due mainly to currency sovereignty. But double dip talk is beginning, meaning deficits could increase.
Europe is where this debt crisis is focussed. If anyone has market talk, please add comments.
P.S. – the Dow is down over 400 points today. So, those non-farm payrolls had better deliver tomorrow or it will not be good.
In terms of credit, tons of volume was flowing through the iTraxx Xover and Main (very liquid, specially compared to particular names where you cant get size without moving b/o). Credit MMs i spoke to said the majority of buyers of short risk were simply hedging their already outstanding positions, so not that much directional bets taking place. Take home point was expect to see another persistent bid to protection today coupled with sharp intraday moves on any sort of newsflow out of the EU as well as imminent job numbers out of the US.
The Netherlands seems to have avoided scrutiny. It was the dutch ING with its debts that brought down RBS, and led to another billion loss in its greek debt. So I expect other banks to have some nasties in their accounts.
Slovakia is probably similar to Hungary, it will expose Austrian banks in particular I think.
Germany might be in good shape if it where not for the bailouts of its banks. A lot of national pride is going to be destroyed when the crisis gets home. Germany could be a basket case if it continues to bail out its banks via Greece, Ireland, Spain etc.
The UK’s two big rescued banks are probably going to have to report more losses. Lloyds had a huge loss as a result of mis-selling insurance, and RBS has billions of overseas debt which may be worthless. Then its investment banking arm has not been making money recently. A couple of days ago the new head of RBS Simon Hester said it was not a banking crisis but one of imbalances. That does not inspire confidence.