Below
are the most recent CDS and euro basis swap charts … not much has changed, but it looks like a brief pause in the rally in euro area CDS may be in the offing. A brief note on the frequency with which we post these charts – it will tend to be higher when there are noteworthy moves and lower when not much is happening, but we will keep updating them with some regularity as long as the crisis situation is simmering.
At the moment it remains the case that the markets doubt the creditworthiness of many sovereign debtors within the euro area and on its periphery. The EU/IMF bailout plan, the biggest single bailout/guarantee (in terms of the absolute amounts involved) yet devised in the course of the financial and economic contraction that began in 2007, appears not to have sufficed to truly calm the fears of market participants. This is in spite of the fact that Europe has at least made an attempt at cutting back the deficits that have careened out of control. In part the US based credit rating oligopoly has a hand in shaping these perceptions, in spite of its tendency to show up late when market perceptions of hitherto considered 'safe' debt suddenly begin to deteriorate. The EU's sovereign debt crisis provides cover for more money printing and deficit spending in the US, as it serves both as a distraction from the growing US government debt problem and a facile explanation for why the various stimulus measures to date have not worked as expected.
Be that as it may, the markets are apparently in doubt as to whether the announced austerity measures will suffice to solve the problem or whether the nations concerned actually have the political will to see them through. As far as we are concerned we question if it makes any sense whatsoever to bail out deadbeats that would normally be forced to restructure. Of course common sense is not the main consideration in these bailouts – what continues to drive these efforts is the fact that a great many euro area banks are up to their eyebrows in the very debt that has begun to look dodgy.
1. CDS
5 year CDS on Portugal, Italy, Spain and Greece (price scales in bps. , color coded). The advance has lost a bit of momentum lately, which could indicate a pause in the rally is coming. However, there is no indication yet that the move is over – click for higher resolution.
5 year CDS on Ireland, Slovenia, Lithuania and the Ukraine (price scales color coded) – a very similar situation, with momentum slightly slowing – click for higher resolution.
5 year CDS on Romania, Croatia, Hungary and Bulgaria. A similar picture – the uptrend remains perfectly intact, but the advance has slowed a bit in recent days – click for higher resolution.
The Markit SovX generic index of CDS on 19 Western European sovereigns. Please note, this chart is only updated until Friday, Monday's data were not yet available for some reason. In any case, it continues to rise toward resistance – click for higher resolution.
2. euro basis swaps
Three month euro basis swap – unchanged at minus 51.5 basis points. So while it hasn't gotten worse, it remains stuck at what is a concerning level – click for higher resolution.
One year euro basis swap – a slight improvement to minus 41.55 bps – click for higher resolution.
5 year euro basis swap – this has interestingly improved quite a bit in recent days. We're not sure how meaningful this is, but perhaps it is a hint that the recent stresses in euro-land credit markets are about to ease for a bit, given that the swaps usually move directionally in tandem across the curve, and opposite to CDS – click for higher resolution.
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