Dεfαult risk | FT Alphaville

Dεfαult risk

A CDS curio for you on Friday: in addition to hitting another record high, the term structure of Greek CDS has inverted, indicating that the market now believes there’s a higher probability of a default in the short-term than in the longer term.

It’s quite a change from just a week ago, as you can see from the below:

We’re guessing this has to do with ECB president Jean-Claude Trichet’s comments that Greece won’t be getting any special treatment, especially when it comes to the central bank’s collateral policy.

Here’s some background, from Evolution Securities’ Gary Jenkins:

ECB President Trichet, in the Q&A session following the ECB meeting, stated that the ECB will not change its collateral framework for any country: “no government, no state can expect special treatment”. This could lead to funding problems for Greece, should it suffer further rating downgrades, as the ECB collateral criteria are due to return to A3/A- or better at the end of the year from its current relaxed Baa3/BBB- level. Moody’s is the only of the major three rating agencies giving Greece an A rating (A2 negative outlook).

So what are the chances of Moody’s downgrading further? A Moody’s report published on Wednesday (European Sovereign Outlook) was negative on Greece’s prospects and stated that for Greece the likelihood of a “slow death” is high. In the same report it said “we do not downgrade a government simply because it gets into difficulty; we only downgrade if we believe it cannot get out of them”, which would indicate that the recent downgrade may not be the last. Greece’s ability to fund itself will be very seriously affected should its debt no longer be eligible as collateral with the ECB and as such it is dependent on holding on to Moody’s rating, which would appear unlikely.

We mentioned on Tuesday of this week an article in the FT “Greece looks to go the way of Argentina”. The more I think about it the more I think that the major concern is not that Greece is the next Argentina, but could potentially be the next Lehman’s. Thus for all President Trichet’s words yesterday, I think that the EU will have to give serious consideration to providing Greece with some kind of bail out, if it becomes necessary to do so.

Related links:
Greece default or no? – FT Alphaville
Europe cannot afford to let Greece default – FT
More Greece… – The Long Room