The CDS market doesn’t believe in Greece containment | FT Alphaville

The CDS market doesn’t believe in Greece containment

So much for comforting markets.

After much to-ing and fro-ing, Greece requested €45bn in financial aid on Friday.

The result? Bond yields above 13 per cent on Monday. CDS above 700bps — and illiquid.

What’s more, according to Fitch Solutions, the CDS market is basically in the process of giving up on the eurozone.

The Fitch analysts, led by Jonathan Di Giambattista, looked at the difference between the euro and US dollar CDS spreads on Germany — Europe’s strongest economy — as a barometer for CDS market sentiment towards the eurozone as a whole.

The result: not so good.

Here’s the methodology:

The relative percentage of the euro to US dollar quotes implies under certain simplifying assumptions the market-implied FX devaluation jump of the US dollar/euro FX rate in the event of a default. This indicates the incremental amount of euros needed to buy US dollars following a potential default. This devaluation jump is derived from the USD and euro CDS quotes on Germany and is illustrated in the Implied FX Devaluation Jump chart. The chart highlights that the CDS market is increasingly concerned about the prospects of the euro, with the jump still on an upward trend, meaning that increasingly more euros are needed to pay protection taken out on US dollars in the possibility of a default.

And the chart:

In words, the percentage difference between the euro and US dollar CDS spreads on Germany increased from 7 per cent in January to 29 per cent by the end of last week. That means the value of protection priced in euros is now 29 per cent lower than in US dollars, because of fears of a fall in the value of the euro.

As Fitch Solutions rather bluntly puts it:

In essence, the CDS market clearly perceives that the bailout is unlikely to contain the funding crisis to Greece, but is anticipated to impact all euro zone economies due to concerns around the value of the euro.

Someone pass the ouzo, port, wine, Schnapps — and quick.

Related links:
EURUSD – the ’slow-bleed restructuring scenario’ – FT Alphaville
The end of the euro – FT Alphaville
‘It is relatively clear that (in economic terms) the Euro does not work’ – FT Alphaville
Bored with Greece? BNP Paribas is too – FT Alphaville