Sovereign/Corp spreads widening...

...see FT article below.

We should see these spreads narrowing quickly. An arbitrage play that assigns less risk for citizens than the country they inhabit cannot last. This misprices the ability of EU corporate giants to relocate capital and personell to other jurisdictions.

Note as well that the combined risk of default by all the EU countries is at issue. If these EU countries "defaulted", one would think the 125 companies would experience balance sheet pressures on a tectonic scale as well.

By David Oakley in London
Published: January 12 2010 19:47 Last updated: January 12 2010 19:47
The cost of insuring against the risk of debt default by European nations is now higher than for top investment-grade companies for the first time, as mounting government debt prompts fears over the health of many leading economies.
It now costs investors more to protect themselves against the combined risk of default of 15 developed European nations, including Germany, France and the UK, than it does for the collective risk of Europe’s top 125 investment-grade companies, according to indices compiled by data provider Markit.
Markit’s iTraxx Europe index of 125 companies is trading at 63 basis points, or a cost of $63,000 to insure $10m of debt over five years. This compares with 71.5bp, or $71,500, for Markit’s SovX index of 15 European industrialised nations.
Fears over sovereign risk have risen sharply in the past few months as investors have become increasingly alarmed over rising budget deficits and record levels of government bond issuance needed to pay off public debt.
By contrast, hopes of a recovery have helped support corporate credit markets. Since September, the SovX index has jumped 20bp, while the iTraxx Europe index has narrowed 30bp.
Bankers are even warning that big economies, such as the US and the UK, could lose their top-notch triple A status because of the deterioration in public finances.
Russell Jones, head of fixed income and currency strategy research at RBC Capital Markets, said: “The US and the UK could be downgraded because of their debt levels.
“Countries, such as Greece, are in a worse position, whereas many corporates look in relatively good shape.”
The cost to insure Greece, which saw its stocks and bond markets tumble on Tuesday after the European Commission said there were severe irregularities in its statistical data, has risen 140bp since September, to 263bp. This is six times more than leading companies such as Unilever, BP and Deutsche Post.
Before the financial crisis, the cost to insure sovereigns was lower than corporates. In August 2007, Greek CDS traded at 11bp, while Unilever, BP and Deutsche Post all traded around 20bp.
Bankers caution that liquidity in the sovereign CDS markets is still low, meaning that just a handful of buy orders can move prices sharply. Liquidity in the corporate CDS market is much higher.
However, even in the highly liquid sovereign bond markets, the debt of governments, such as Greece, is cheaper than many corporates.
Greek five year bond yields, which have an inverse relationship with prices, are 4.75 per cent compared with Deutsche Post’s five year bonds at 3.174 per cent, BP at 3.178 per cent and Unilever at 3.312 per cent