Friday, February 12, 2010

Shifting blame...

to those who either cannot defend themselves politically or who are too dispersed for organized action.

The Gnomes of Switzerland, The Vultures of Germany, etc. Popular scapegoats, but the world is a better place for their relentless discipline. Would the countries in question rather have their profligacy and licentiousness continue unrestrained until a much larger problem arises?

Greek and Spanish politicians complain that their countries and
possibly the whole euro zone have come under speculative attack by
shadowy forces, leading to the rush to develop a euro-zone bailout

The credit-default-swap market, already targeted for its alleged role
in fomenting the financial crisis, has come under suspicion. But it
isn't that straightforward.

True, the sovereign CDS market is playing a role: In the month to Feb.
5, the number of contracts outstanding on the Markit iTraxx SovX
Western Europe index of 15 sovereigns doubled, according to Depository
Trust & Clearing. Moves in Greek credit-default swaps seemed to lead
developments in the underlying bond market, even though there are only
$80 billion of gross contracts on Greece, versus about $385 billion of
Greek debt.

There have been disconnects, with real investor demand seemingly at
odds with the picture painted by credit-default swaps. Portugal this
week sold a highly successful €3 billion ($4.1 billion) bond while its
CDS curve was inverted, which would normally suggest intense stress.

But the real pressure may be as much due to hedging as speculators.
Any speculative positions were probably taken a good time ago, when
the cost of buying insurance against a Greek or Portuguese default was
much cheaper. The real shift higher in costs is likely to have come as
traditional investors with exposure to Greek or other southern
European assets—including stocks and corporate debt, as well as
government bonds—became concerned about possible contagion and
spillover effects due to the crisis in Greek public finances.

They will have been using the CDS market to hedge exposure. Bank
risk-management desks also will have been forced to buy protection as
liquidity in the underlying bonds declined and their price dropped,
adding to the pressure.

There have been sovereign crises for as long as there have been
sovereigns. Investors always will find a way of betting against
governments. The CDS market has made credit risk more easily
observable, and in the case of the euro zone, is a way of
circumventing the protection the euro offers to weaker members.

If the euro zone is forced to rescue Greece, then calls for regulation
of CDS markets may become louder. Some investors already are
considering, carefully, how they make use of CDS even for hedging
purposes on this basis. But the leap in sovereign CDS costs is a
symptom, not the cause, of Greece's problems.

No comments:

Post a Comment