Is Greek CDS getting out of hand?
On Wednesday, the cost of insuring debt of the Hellenic Republic rose to a record 353.5bp, according to CMA DataVision. Which means the country’s CDS chart looks something like this:
Interestingly, the record rise of Hellenic Republic CDS in recent months means the cost of insuring Greek corporate debt is roughly half that being asked for Greek sovereign debt.
From Andrea Cicone at BNP Paribas’ credit team:
That’s sovereign CDS for select European countries, versus the average CDS of non-financial and financial companies in those countries, as measured by iTraxx indices.
Can you see the trend? And should that be happening?
Here’s what Cicione says:
Theoretically speaking, there is no fundamental reason to assume that a country’s sovereign risk has to be lower than corporate risk for companies based in that country. One could have a well-run, debt-light company with large and stable cash flows, based in a country that is badly managed and overburdened by debt. In reality, however, there are a few reasons – some fundamental, some technical – to believe that higher sovereign credit risk should translate in higher corporate credit risk.
Those reasons include things like currency risk, the (remote) possibility of expropriation, and holdings of local government debt — especially for banks. There’s also the risk of crowding out; a country with large budget deficits might have to issue more debt, which could compete with corporate debt.
And the difference between financials and non-financials is really key here:
The main worry, in our view, comes from crowding out. While non-financial corporates have pre-funded part of their 2010 redemptions in 2009, and can afford to issue relatively small amounts of debt if the primary market conditions became unfavourable, banks’ refinancing schedule looks quite busy this year (Chart 3). The amount banks need to refi is certainly manageable, as it is in line with the past few year’s issuance – and there still seems to be appetite for credit among investors. However, most of the supply will consist of senior unsecured paper and covered bonds – two sectors that are likely to face the competition of government bonds.
Related links:
Where’s the Greek CEE contagion? – FT Alphaville
Grεεk dεbt disastεr – FT Alphaville
Dεfαult risk – FT Alphaville
Greece will fix itself from inside the eurozone – FT