FT columnist Wolfgang Münchau is increasingly skeptical.
Martin Tayler, the former CEO of Barclays, is concerned.
But there’s one place where eurozone unity is still, or rather was of March 18, being priced in: the CDS market.
Sovereign CDS for the Hellenic Republic has somewhat diverged from the country’s economic fundamentals in recent weeks – in this case Deutsche Bank’s `twin deficit’ measure of current account and fiscal deficits.
Which means, rightly or wrongly, the CDS market has been pricing in some sort of eurozone support for the country, according to the German bank. Here’s what Deutsche’s Abhishek Singhania and Soniya Sadeesh say:
Firstly, the explanatory power of current account balances in explaining the variation in spreads for Euroland countries has reduced. Secondly, the weighted average Euroland CDS spread is now less wide compared to the US and UK than it was in early February. Both these developments suggest that implicit support for the weaker Euroland sovereigns has now been priced back in. In early February concerns about the possibility of one of the weaker Euroland peripheral countries being allowed to default or a possible break-up of the EMU was much higher. In such a scenario the current account deficit for the individual Euroland countries matters more and the political and fiscal disunion resulted in wider CDS spreads for the Euroland relative to the UK and US.
You can see the effect in the below charts, which show five-year CDS spreads versus that Deutsche Bank “twin deficit” metric on March 18 and February 8, when default risk seemed a greater worry for investors:
Note though that the situation is very much in flux. Back to Deutsche:
However, as we had highlighted earlier, developments in the Greek situation will remain volatile. The latest news reports suggest that divisions persist within the Eurozone countries on the support mechanism for Greece even now. If such concerns were to reappear a move towards the state of things in early February should be expected, i.e. increased importance of current account balance in explaining variation in spreads within Euroland countries, underperformance of Euroland CDS relative to US and UK and a flattening of the spread curves. We thus close out our 5Y-10Y spread curve steepener in Greece.
Given German chancellor Angela Merkel’s most recent comments that investors should not expect a Greek aid package, that would seem a prudent move.
Related links:
Brinkmanship, Greek style – FT Alphaville
FT Alphaville’s Greekbailout-o-meter says… – FT Alphaville