Friday, February 5, 2010

Once again, its the credit default swap contagion

Remember how credit default swaps were supposedly making the system safer by spreading risk?

Investors may be betting that banks and other European companies are likely to suffer if European governments like Greece are forced to institute austerity measures like higher taxes that end up snuffing out economic recoveries. Banks also are large buyers of European government bonds, and may be selling bonds or buying insurance using credit-default swaps to protect themselves from feared credit-ratings downgrades of countries. Furthermore, banks may be buying insurance to offset insurance they actually sold to other players, observers say.

Any fresh round of fear surrounding banks, meanwhile, would also imperil the companies that borrow from them.

And who is trading them?


Anonymous said...

So will they let europe fail like leahman? Causing a double dip in the market?

Palmoni said...

those trading the swaps will want an answer by tomorrow!

goldman said this:

If contagion from Greece engulfs other countries, then up to 20%-30% of Euro-zone GDP could be under severe stress. Were a major financial instability event to develop, we would expect the ECB to pause in its exit strategy, and then, if needed, reverse course and reinstate longer-term financing.

and in Euro news Spain PM said country was fine, because they already said no chance of a Eurobond bailout

just noise--countries don't "fail" overnight, just the banks who write the swaps!

Palmoni said...

but think about what happens when the CDS rates go up--if it cost so much more to insure their debt--then the rates rise, which squeezes the ountry more--until te financing door gets shut!

so who owns what, and who isn't hedged?

blow up the banks who hold the paper first

Anonymous said...

So your bearish on the big banks?