The debate about the usefulness of sovereign credit default swaps (SCDS) intensified with the outbreak of sovereign debt stress in the euro area. SCDS can be used to protect investors against losses on sovereign debt arising from so-called credit events such as default or debt restructuring.
Although CDS that reference sovereign credits are only a small part of the sovereign debt market ($3 trillion notional SCDS outstanding at end-June 2012, compared with $50 trillion of total government debt outstanding at end-2011), their importance has been growing rapidly. With the growing influence of SCDS, questions have arisen about whether speculative use of SCDS contracts could be destabilizing - and this caused regulators to ban non-hedge-related protection buying.
The prohibition is based on the view that, in extreme market conditions, such short selling could push sovereign bond prices into a downward spiral, which would lead to disorderly markets and systemic risks, and hence sharply raise the issuance costs of the underlying sovereigns. The IMF’s empirical results do not support many of the negative perceptions about SCDS. In particular, spreads of both SCDS and sovereign bonds reflect economic fundamentals, and other relevant market factors, in a similar fashion. Relative to bond spreads, SCDS spreads tend to reveal new information more rapidly during periods of stress, admittedly with overshoots one way or the other. Given the current apparent ‘stability’ in many nations’ bond market spreads, the chart below suggests an alternative way of judging what the credit market thinks – the volume of protection bid – and in this case some interesting names emerge.
Do Sovereign CDS Lead or Lag – the answer is both…
READ MORE
Today
Egon von Greyerz told King World News that within months, as more fires
start to burn in the financial system, the world will see a massive and
stunning coordinated global rescue package and one of the greatest
short squeezes in history. Greyerz also said all of the major countries
will participate. Below is what Greyerz, who is founder of Matterhorn
Asset Management out of Switzerland, had to say in this tremendous
interview.
FEIF had stalled around $50 for about (5) months towards the end of
last year. In January, the stock broke higher and rallied to where it
currently sits. For the last (3) months the stock has been hitting
resistance at $65 (red). A break through that resistance would be a new
52-week high for the stock and should mean higher prices moving forward.
