In the true spirit of October 31, today we thought we would try our best to try and scare you. Five charts, each more scary than the last.
1. Capital fright
Uncertainty in Europe is having a significant impact on investor and consumer confidence. This is manifesting itself in a flight to quality for capital, which the below chart highlights rather well. Most economists agree that capital fl… Read the article
We have written on numerous occasions about the hitherto inseparable links between sovereigns and banks, and we have also written about the benefits of writing down bonds to create capital (see The New Era for Bank Bonds: Send In The Clowns? and Equitisation of bank capital bonds) . In 2007 the global markets woke up to the fact that the US subprime market was blowing up, and in 2008 realised … Read the article
Two months ago I questioned whether the decoupling between credit spreads and economic fundamentals could continue for much longer. I felt at the time that at some stage the weakening economic data would start to drag credit spreads wider, at least relative to government bonds. I also asked whether we might enter an environment in which high quality investment grade credit could see a flight to… Read the article
A renewed focus on European bank balance sheets, their sovereign exposures, fears of creditor bail ins and a general risk apathy saw subordinated financials spreads move significantly wider through November. I’ve charted the ratio of spreads, comparing the Merrill Lynch EMU Financial Corporate Index, Sub Type (EBSU) against the EMU Corporates, Industrial, BBB rated (EJ40) below. Whilst sub fina… Read the article
Following on from Jim’s Sovereign CDS Q&A blog (see here) I came across this chart at zerohedge.com. Whilst I can’t vouch for its accuracy, the chart shows that the actual net amount of outstanding sovereign CDS contracts, relative to outstanding government debts, are actually very small. That would seem to add weight to Jim’s argument that the pressures faced by governments are borne ‘of fis… Read the article
The market in sovereign credit default swaps has sprung to life over the past year as worries about the health of nations, rather than corporates, have multiplied. Problems in Dubai in December, and Greece right now, on top of a general deterioration of the developed economies’ budgetary positions have seen sovereign CDS making headlines. Here’s a chart of some of the latest CDS spreads on th… Read the article