Tuesday, 27 April 2010

It is all playing nicely as expected in my post from the 10th of April...

Sovereign debt is now High Yield and Emerging Market is Investment Grade.

I had a thought today following S&P cutting the Greek debt from BBB+ to junk, BB+.

I had a discussion on ratings and perception today:
"GM had S&P's highest investment-grade rating, AAA, from 1954 to 1981. S&P rated Ford AAA from 1971 to 1980."
I remember watching Toyata's rating increase to AAA (although they recently lost it...)while GM moved from AAA to junk.

Same thing is happening now. Sovereigns debt in some Western countries are getting hammered while you can expect ratings from emerging markets to improve in the next couple of years.

In my previous article I was highlighting the upcoming rise of the VIX:


Today Bloomberg is indicating the following:

VIX Jumps Most Since January on Greece Downgrade; VStoxx Gains

"The VIX, as the Chicago Board Options Exchange Volatility Index is known, surged 21 percent to 21.19 at 12:40 p.m. New York time. The index measures the cost of using options as insurance against declines in the Standard & Poor’s 500 Index, which tumbled 1.9 percent. Europe’s VStoxx Index, a gauge of options on the Dow Jones Euro Stoxx 50 Index, climbed 17 percent to 28.56."


Looks like I was right and I am sure people who bought ATM call option on the VIX had a very good day today.

Also I highlighted previously about the Greek tragedy and the high correlation between the country's ratings and the fate of its banks, given that banks are a leveraged play on the economy, it is no suprise that Banks stocks have taken a beating today.

Alpha Bank ADR is down 9.30% today.
Given most of them are privately owned, it is difficult to gauge how they have impacted by today's market move, but given their rating correlation to the country's rating, they will also be seriously downgraded to junk status.

The cost of insuring Greece's sovereign debt against default for five years rose 87 basis points to an all time high of 798 basis points today as per CMA DataVision.
The annual cost of insuring 10 million USD of Greek sovereign debt for 5 years has risen by 87,000 USD to 798,000 USD from Monday's closing level.

Please find the link to the very useful CMA DataVision website which enables you to track CDS levels for sovereign. CDS are a very good indicator for risk monitoring as well as VIX.


Greece 5 year in Euros is currently at around 787.36 bps and the Cumulative probability of Default stands at 46.01 %. The yield on two-year Greek bonds bungee jumped to 15.35% from 13.16% on Monday...

Portugal is already targeted in the contagion list following the Greek troubles...with the current CDS 5 year at 335 bps.

As per Bloomberg:

"While Portugal’s public debt of 77 percent of gross domestic product is on a par with that of France, the burden including corporate and household debt exceeds that of Greece and Italy, at 236 percent of GDP. The savings rate is the fourth-lowest among 27 members of the Organization of Economic Cooperation and Development, according to the Paris-based group’s data."


So much for the V recovery expected by the equities market...

Once again Credit Markets are indicating trouble ahead, as they did back in 2007, following the beginning of the subprime debacle.

As per David Rosenberg's latest review on current economic troubles:

"But Mr. Market at some point will have to confront the future. The time gap between recessions is shortening now — we went 10 years from 1990 to 2000, then 5 years from 2002 to 2007 and the next recession, following this pattern, is likely going to occur within the next 2-3 years. And, unlike the start of the last recession when the government had so many arrows in its quiver, there are none today to help lift the economy again."


To reiterate what David Rosenberg, David Goldman pointed out on various occasions (please see shortcuts to their research on this blog), which I agree with, there will be no real recovery until small businesses start creating jobs and given current credit constraints in the market, it doesn't seem to be happening at the moment.

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