Eurozone CDO – we have a mezzanine problem | FT Alphaville

Eurozone CDO – we have a mezzanine problem

The EFSF is like a CDO. So is the entire eurozone — an analogy which has been made ad nauseum.

The point being that the eurozone is now all about sharing and portioning its members’ debt.

So if you think the eurozone saga has suddenly turned to Italy’s current debt dynamics — think again.

Credit Suisse’s inimitable Will Porter reckons it’s still about Spain, but with concerns over bailing out Spain merely expressed vis-à-vis Italy. If that sounds more comfortingly familiar to you, stop right there. If Porter’s theory is correct it means the eurozone crisis has well and truly spread from the worst of the eurozone peripherals, and is now migrating its way closer to the core.

The rot has shifted from the junior to the mezzanine tranches of the eurozone CDO, if you will.

Here’s Porter’s thinking:

… “If this crisis is all about Spain, then it is also all about Italy’s willingness to be paymaster” [we wrote back in January]. And, by extension, the market’s willingness to fund Italy if she is a willing paymaster. This line of thought suggests that “it is all about Spain” still, despite the fact that Spain so strongly outperformed Italy during the most recent episode of risk aversion. It follows that the window to forcefully address the crisis is still open for now.

We therefore interpret Friday’s weakness in Italian spreads as a structural, not an idiosyncratic move. In CDO terms, Italy represents the beginning of the involvement of the mezzanine tranche. We represent this in Exhibit 2. Warning; it is not for the faint of heart.

It follows for us – and we accept we cannot expect all readers to take this leap with us, let alone all policymakers – that the widening in Italy is not due to fears of private-sector participation in Greece, but to fears of can-kicking. To fears of further peripheral public-sector participation …


Related links:
The CDO at the heart of the eurozone – FT Alphaville
A collateralised eurozone debt obligation? – FT Alphaville