Who will blow up first? Sovereign cds tracking thread - Economics -- Two Plus Two Poker Forums

A credit default swap (CDS) is a swap contract in which the buyer of the CDS makes a series of payments to the seller and, in exchange, receives a payoff if a credit instrument (typically a bond or loan) goes into default (fails to pay). Less commonly, the credit event that triggers the payoff can be a company undergoing restructuring, bankruptcy, or even just having its credit rating downgraded.

CDS is basically betting on who will default on their debt (a "credit event"). Sovereign default does not mean the same thing as a corporate default, but the CDS spreads are illustrating as to the perception of the fiscal state of various sovereigns.

Here is a short, intro primer on sovereign CDS from Warren Pollock in the context of Dubai

Quote:

Why looking at the CDS market is interesting

A Credit Default Swap (CDS) insures against losses stemming from a credit event. In the context of countries, the contract protects against the default of the issuing sovereign. The premium (spread) which the protection buyer (e.g. a bank) pays to the protection seller (e.g. an insurance company) is determined by market forces and depends on the expected default risk of the respective country.

Therefore, CDS spreads are an indicator of the market's current perception of sovereign risk. Notice though that CDS spreads also depend on the global financial environment, in particular on US interest rates and global risk appetite.

meh

A source for updated 5 year Sovereign CDS spreads and daily leaders in widening/tightening

Quote:

Highest Default Probabilities

Entity Name Mid Spread

Venezuela 1335.82
Ukraine 1346.77
Argentina 1093.08
Pakistan 687.50
Dubai/Emirate of 600.74
Latvia, Republic of 552.55
Iceland 397.36
Lithuania 322.14
California/State of 238.50
Greece 232.19

A little older but some more perspective on amounts of sovereign CDS held:

http://www.economist.com/markets/ind...ry_id=14972951

Here is ZH on yesterday's big movers. One way to use cds spreads is to see whose cds is widening, because that generally means the market thinks things are getting worse for the issuer.

12-10-2009 , 09:23 PM

J.R.

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One reason this is fun to watch is because many trillions of dollars of credit default swaps have been underwriten by banks like JPM, Citi, GS, MS, BoA, UBS, Barclays, etc and thus this can blow up the banking industry in the USA and Europe in a heartbeat.

12-11-2009 , 10:04 AM

SMB

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Great thread idea and OP

What I find particularly interesting about this market is that it further involves political calculations than just about every other market. Venezuela (I don't believe, but I don't follow them very close) is more of a political risk than having the worst balance sheet or devaluation pressure.

Concerning the chart on biggest sovereign CDS positions, many of the names being traded in Europe are spread trades. Since no one believes they would even get paid out on a German default (armageddon LDO), it's useful to think of the German CDS as a component in a spread trade - i.e. what is the bps difference between German/Italian or German/Greek yields and credit risk. I'm sure you know this J.R., but this market can be opaque if you haven't studied it or done some work in it.

12-16-2009 , 02:25 PM

J.R.

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Quote:

Originally Posted by SMB

What I find particularly interesting about this market is that it further involves political calculations than just about every other market. Venezuela (I don't believe, but I don't follow them very close) is more of a political risk than having the worst balance sheet or devaluation pressure.

I agree but in practice I dunno if you really can't separate the two. I see them as 1) direct economic pressures and 2) possible political action that is largely in expectation of these pressures).

I see politics as beholden to the economy - for example Venezuela is a crazy socialist close to dictatorship type government. Despite having lots of oil their banks are all failing (8 or so in the past couple weeks, 12% of their system), they are in a recession, they have lots of crime and the worst inflation in Latin America (@30%) and some/a lot of their debt is dollar denominated (can you say currency crisis?).

Chavez is closing banks not just because he is crazy, his country is an economic disaster. This is not whimsical socialist dictatorship moving towards social justice as he spins it, this is a ship lost at sea in huge storm.

http://online.wsj.com/article/BT-CO-...07-711071.html

==============

I think we should get more discussion on this. I know CDs part of synthetic CDOs of emerging market debt and I understand a little about the spread trade speculation. Love to hear more.

But I am most interested in the the impracticability argument, of that if a big nation has a credit event no one will be there to pay off the CDs.
Some ideas for that side of the case:

Quote:

Many theoreticians, especially those of the post-March lows variety, have sprung up and are speculating that buying Credit Default Swaps on the US is ultimately a futile and pointless endeavor. The main argument: a US default would likely mean that interconnected dealers won't recognize contracts on a US default event, as they themselves will be out of business. Even if they continued to exist, like cockroaches in a postapocalyptic world, the collateral which backs derivatives is mostly US Treasurys: the same obligations that would end up being massively impaired. Furthermore, even though US CDS try to isolate currency risk by being euro denominated, a somewhat gradual collapse into default would make the dollar lose its value, which would make premium payments in euros untenable for the protection buyer.

http://www.zerohedge.com/article/sel...y-short-dollar

Some ideas for sovereign CDS being a real instrument:

Quote:

first, USA sovereign risk moves with dollar devaluation fears (priced in EUR remember) as well as real restructuring risk; second, try not to think of this like a corporate default (more like an even that triggers CDS) but expect high recoveries (which would typically be spread positive BUT the devlauation of the dollar in this case would force spreads (in EUR) wider; third, clearing for CDS is coming and in that case there WILL be payment in the event of a default event...

Try not to simply dismiss the idea of a sovereign default in a major developed economy. DTCC data shows that sovereign protection are the largest gross notionals and not just some illiquid corner of the market. This rise in sovereign risk is important (and not a blip) as we are seeing up-in-quality trades in corporates BUT at the same time the very tightest credits widening as this sovereign risk leaks back into corporates.

====

Quote:

A primer on sovereign defaults: when the reference entity is a sovereign, such as the U.S., a credit event includes the failure to pay interest or principal on Treasuries or government-guaranteed debt, a repudiation/moratorium of existing debt obligations, or a restructuring of the terms of obligations that disadvantages creditors.

12-16-2009 , 03:27 PM

Riverman

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If, as you say, nobody actually expects to get paid in full if a credit event happens, why buy the protection? If it's just to bet on a country's economic prospects/fiscal condition, aren't there much easier, i.e. non derivative, ways of doing this?

12-17-2009 , 12:47 PM

Bigdaddydvo

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A corollary to Riverman's point, isn't it insanely profitable to sell these since no one could reasonably expect payment in the event of say, a U.S. or German default?

12-17-2009 , 12:54 PM

Bigdaddydvo

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Moody's warns of social unrest as sovreign debt spirals:

Quote:

In a sombre report on the outlook for next year, the credit rating agency raised the prospect that future tax rises and spending cuts could trigger social unrest in a range of countries from the developing to the developed world.

It said that in the coming years, evidence of social unrest and public tension may become just as important signs of whether a country will be able to adapt as traditional economic metrics. Signalling that a fiscal crisis remains a possibility for a leading economy, it said that 2010 would be a “tumultuous year for sovereign debt issuers”.

It added that the sheer quantity of debt to be raised by Britain and other leading nations would increase the risk of investor fright.

Strikingly, however, it added that even if countries reached agreement on the depth of the cuts necessary to their budgets, they could face difficulties in carrying out the cuts. The report, which comes amid growing worries about Britain’s credit rating, said: “In those countries whose debt has increased significantly, and especially those whose debt has become unaffordable, the need to rein in deficits will test social cohesiveness. The test will be starker as growth disappoints and interest rates rise.”

It said the main obstacle for fiscal consolidation plans would be signs not necessarily of economic strength but of “political and social tension”.

Greece, where the government has committed to drastic cuts in public expenditure, has suffered a series of riots over the past year which are thought to have been fuelled by economic pressures.

Is Sovreign Debt the New Sub-Prime?

Quote:

Is Sovereign Debt the New Subprime?

That’s a question many on Wall Street are asking as 2009 comes to a close. Just as many subprime borrowers were unable to make their mortgage payments in 2007 and 2008, investors now fear certain nations will be unable to pay their debts in the year ahead.

Rising mortgage defaults and credit card delinquencies put many banks on the brink of bankruptcy in 2008, sending the global economy into a tailspin. But sovereign debt defaults are potentially even more catastrophic as they can lead to geopolitical instability, societal unrest and even war. And there will also be economic ramifications for investors worldwide, putting America’s (and the globe’s) fragile recovery at great risk.

To varying degrees, Greece, Spain, Ukraine, Austria, Latvia, Mexico are just a handful of the nations viewed at risk of defaulting. Meanwhile, Dubai only just avoided a similar fate thanks to a $10 billion bailout from their oil-rich neighbor Abu Dhabi.

So, who else out there could rattle our constantly more interconnected world? Here's a look at where the trouble spots could be:

Greece: Fitch Ratings last week joined two other ratings agencies in expressing concern about the country’s health. “Greece faces the risk of sinking under its debt,” Prime Minister George Papandreou said Monday in a speech where he pledged to slash the nation’s budget deficit by overhauling the nation’s tax system and cutting government spending.

Ecuador, which defaulted in December 2008 when President Rafael Correa said the nation wouldn't make an interest payment of more than $30 million on a $510 million bond issue, carries a CCC+ rating at S&P. They define the debt issuers in the CCC category as "[c]urrently vulnerable and dependent on favorable business, financial and economic conditions to meet financial commitments." Translation: Probably in for hard times.

Argentina, Grenada, Lebanon, Pakistan and Bolivia are judged to be a little better off, but they're saddled with still dubious B- ratings. The single-B classification at S&P means these nations are "[m]ore vulnerable to adverse business, financial and economic conditions but currently [have] the capacity to meet financial commitments." Translation: Not good, and needs some things to go right, preferably soon.
Mexico: This week, S&P cut some of its ratings on America’s southern neighbor, but said the outlook is stable. Why the move? Because the agency believes Mexico's attempts to raise money through sources other than oil revenue and to make the economy more efficient "will likely be insufficient to compensate for the weakening of its fiscal profile." Put it on your watch list.

Spain: Before you go thinking that problems can only emerge from closed regimes or places economists have stuck with the "developing" tag, think again. Earlier this month, Spain's outlook was dropped to negative from stable by S&P, owing to fears the nation "will experience a more pronounced and persistent deterioration in its public finances and a more prolonged period of economic weakness versus its peers."

================================================== =======

What Is Sovereign Debt?

Now that we’ve (hopefully) got your attention, here are some definitions for those unfamiliar with the subject:

“Sovereign debt” refers to the debt of nations. Just as the U.S. issues Treasuries backed by the “full faith and credit” of the government, other nations sell bonds in order to raise money to pay for programs ranging from armies to public healthcare.

A “default” refers to a nation’s inability (or refusal) to repay its debt. Whether a homeowner sends “jingle mail” (home keys via post) because a lost job makes mortgage payments impossible or because a drop in home values makes paying the mortgage uneconomical, the effect on the bank is the same: they lent money and now they’re not getting it back.

The same goes for investors who’ve purchased sovereign debts. This is critical because nations’ debt is often viewed as safer than corporate debt since countries have the ability to raise taxes and increase tariffs in order to raise money to pay their debts.

But “safer” is not the same as “safe” and certainly not guaranteed. There are risks in owning nations’ or sovereign debt, as with any stock. Defaults by Argentina in 2002 and Russia in 1998 are just recent examples in the long history of sovereign debt defaults going back to the Spanish empire in the 1600s.

In a new book “This Time Is Different”, economic professors Ken Rogoff of Harvard and Carmen Reinhart of Maryland, detail the history of sovereign debt defaults, noting common traits, including:

High Debt-to-GNP Ratio

Since 1970, nearly half of sovereign defaults have occurred in nations debt-to-GNP (gross national product) ratios of 60% or more. This makes sense: As a country’s debts start to approach the size of its total economy (or GNP), it gets harder to make the payments, just like a individual whose debts start to eat up all (or most) of their salary.

Countries like the U.S. and U.K. have triple-A ratings, meaning they are considered the strongest in terms of the ability to repay their debt. (The ratings from top to bottom are based on the alphabet, AAA being the best to CCC meaning the financial world doubts your ability to pay the money back.) However, some experts worry about those pristine ratings being in jeopardy as Anglo-Saxon nations continue to accumulate massive amounts of debt to pay for spending, and to take on the recession.

A World of Risk

Few investors seriously worry about an imminent default by the U.S. or the U.K. But with worries about Dubai's ability to pay its debts shaking markets across the globe in recent weeks, investors are on guard about which other countries might be in dire financial straights.

Ratings agency Moody's, for example, said Tuesday that the upcoming year could be a rough one for government debt, issuing a report depressingly titled "Fasten Your Seat Belts: Tumultuous Times Ahead."

Anyone with access to the business pages knows individuals, banks, companies and governments everywhere have a serious problem -- just how bad it is and how long it will last is still being sorted out. Unfortunately, we probably still have a way to go before brighter days return.

12-17-2009 , 01:28 PM

tolbiny

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Quote:

Originally Posted by Bigdaddydvo

A corollary to Riverman's point, isn't it insanely profitable to sell these since no one could reasonably expect payment in the event of say, a U.S. or German default?

No- no one would buy from you unless you held enough collateral, which would tie up significant amounts of your capital in a form not of your choosing.

12-17-2009 , 01:41 PM

tolbiny

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Quote:

Originally Posted by Riverman

Quote:

A corollary to Riverman's point, isn't it insanely profitable to sell these since no one could reasonably expect payment in the event of say, a U.S. or German default?

Zero hedge did a bit on this recently- They reported roughly 11 billion dollars worth of CDS on US treasuries- considering its a market of 9 trillion you can basically say that essentially no one is buying/selling these things.

12-17-2009 , 01:56 PM

#10

T50_Omaha8

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Any updates on the CDS figures?

The Euro is tanking so hard against the USD I've gotta assume they are spiking even more sharply.

12-17-2009 , 02:12 PM

#11

J.R.

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Quote:

Originally Posted by tolbiny

If there are 11 trillion worth of cds contracts wouldn't that mean there is lots of selling/buying of this? My understanding is the sovereign cds market for big nations is real deep and liquid, as evidenced by the 11 trillion.

Its the newer products where the issuer (most GS) is the market maker that is most problematic in the liquidity regard. http://www.zerohedge.com/article/gol...ld-indicate-so

12-17-2009 , 02:13 PM

#12

J.R.

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Quote:

Originally Posted by Riverman

I have some thoughts but wanted to see what others thought. I'm learning about it too.

12-17-2009 , 02:15 PM

#13

J.R.

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T50_Omaha8,

Quote:

Originally Posted by J.R.

A source for updated 5 year Sovereign CDS spreads and daily leaders in widening/tightening

Go eurozone! top Sovereign Wideners:

Entity Name 5 Yr Mid Change (%) Change (bps) CPD (%)
Portugal 82.90 +12.63 +9.30 6.87
Finland 26.40 +12.34 +2.90 2.26
Greece 267.30 +11.96 +28.55 20.71
Germany 24.50 +11.33 +2.49 2.11
Spain 103.40 +10.91 +10.17 8.62
Italy 103.60 +10.73 +10.04 8.62
Poland 132.80 +10.57 +12.70 8.75
France 28.68 +10.33 +2.69 2.44

12-17-2009 , 02:25 PM

#14

tolbiny

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Quote:

Originally Posted by J.R.

11 Billion- with a B.

$11.1 billion in gross notional

12-17-2009 , 02:26 PM

#15

J.R.

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A decent read on the impracticability issue: http://www.acredittrader.com/?p=81

Quote:

As with any CDS-related news, you will get heated commentary in the blogosphere with a large perception of folks simply calling for all CDS trading to be banned. The general consensus appears to be “don’t the buyers of CDS realize that in the event of default by US, these contracts are not likely to be honored anyway?” This is Krugman’s line. Taleb chimes in with “It would be like buying insurance on the Titanic from someone on the Titanic”.

As with any heated commentary there’s bound to be a lot of misunderstanding of what this recent widening actually means and where it comes from. I’ll try to tackle this issue point by point below. For those of us with ADD (myself included) here’s a brief summary:

* Traders don’t buy CDS because they think the name will default; they buy CDS because they think the spread will widen – I make this point in my AIG post. It follows that extrapolating any default information from wider CDS spreads can be misleading
...
* The standard CDS contract is sufficiently complex so that the end-game buyers of CDS can be betting on something much more innocuous than a “default” such as a restructuring of privately negotiated tiny-size debt issuance

...

Quote:

CDS is not a “default” trade – it is a “spread” trade
The most important point to be made here, the same one I make in my AIG post, is that, one shouldn’t look at CDS as a “default” trade. Though their pricing is clearly driven by the likelihood of default and the payout upon default, I can tell you that 99% of people buying CDS do not believe that the entity upon which they are buying protection will actually default. In this, they are similar to investors in stocks. People buy and sell stocks because they think the stock in question will increase or decrease in price. Same goes for CDS.

I think the confusion largely stems from people viewing CDS akin to insurance. Though this is an easy analogy to make, it is, in fact, wrong. What motivates people when they buy fire insurance is that, in the unlikely case their house is consumed by a fire, they will get reimbursed. This is not what drives the CDS market.

There are two key differences between CDS and the insurance analogy:

1. I don’t need to have a position in the entity’s bonds or loans in order to trade CDS on the same entity (while I do need to own the house I buy fire insurance on)
2. As I mention above the vast majority of traders don’t trade CDS because of a view on default – they trade CDS because of their view on the level of CDS spreads expecting to lock in a MTM profit on the trade. Though you can probably save yourself some premium on fire insurance by installing sprinklers it’s clearly not as easy to do nor is it the primary motivation for fire insurance in the first place

...

Quote:

Sovereign CDS is not a “fundamental” trade
I think one thing we can safely dismiss as the driver behind the widening of US CDS spreads, or in fact any sovereign spreads, in the market is any kind of fundamental view of where these spreads should be. The difficulty behind trading CDS on a fundamental default probability basis has to do with the fact that in order to put a number on an absolute default probability you need to have a firm view on: a) default likelihood, b) recovery upon default, c) devaluation of the local currency, to the extent that CDS you are trading is denominated in local currency.

...

Quote:

The “non-default” default
The word “default” has been thrown around a little too easily lately with respect to CDS contracts. The concept of default is, generally speaking, a very loaded one that brings to mind long bread lines, a crippled banking system and runaway inflation. In the context of CDS, the concept of “default” is a very specific one. For this reason, CDS language talks about a “credit event” rather than a “default” and can include such actions as restructuring of debt, repudiation of debt, moratorium and accleration. In summary, the following issues need to be considered in the context of Sovereign CDS.

* The nature of the “credit event”. For Western Europen sovereigns, for instance, these include a) Failure to Pay, b) Repudiation/Moratorium, c) Restructuring. Latin American sovereigns add to this list Obligation Acceleration which was a near possibility when Hugo Chavez declared his country’s pullout from the IMF. The point here is that something like a restructuring of debt can be much more benign than an outright default (i.e. a failure to pay). So, a CDS can often price in a less dire scenario than the likelihood of “default”.
* Generally, anything counting as “Borrowed Money” can trigger a CDS credit event. This can often be a small privately negotiated loan rather than a large bond or loan trading in the market.

12-17-2009 , 02:41 PM

#16

J.R.

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One neat thing is the sorta recent trend for sovereign CDS to widen while corporates flatten/tighten, evidence of the socialization of financial risk as private balance sheet risk is absorbed onto sovereign balance sheets.

Next time somebody talks about debt to GDP ratios or whatever other metric, here are some ideas:

1) keep in mind the importance of the overall debt status of the nation (is it a net creditor like Japan of recent or USA of WWII, meaning that while they have debt, they have more currency assets than debt, and like are a net creditor, not a net debtor) and
2) its level of external debt (is it debt owed to its peoples, because its peoples are savers who bought the debt, like USA in WWII with savings bonds or Japan and to a lesser extent Italia today) or is it owed to some foreign state who isn't as pro the debt issuer's survival as the debt issuing sovereign's peoples (who the sovereign can also legally tax too),
3) as well as what currency the debt is denominated in, and
4) make sure to keep in mind the "private" credit risk of the too big to fail institutions the sovereign is backstopping, like those of the USA:

Quote:

$203 trillion of derivatives. 97% of these ($196 trillion) sit on FIVE banks’ balance sheets.

80 for JPMC
40 for GS
39 BOA
32 CITI
5 Wells

12-17-2009 , 02:47 PM

#17

J.R.

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Quote:

Originally Posted by tolbiny

11 Billion- with a B.

$11.1 billion in gross notional

Ok, same point. there is 11 billion of cds. doesn't this indicate a lot of buying and selling?

I don't get why you say this:

Quote:

essentially no one is buying/selling these things.

12-17-2009 , 02:48 PM

#18

tolbiny

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Quote:

The most important point to be made here, the same one I make in my AIG post, is that, one shouldn’t look at CDS as a “default” trade. Though their pricing is clearly driven by the likelihood of default and the payout upon default, I can tell you that 99% of people buying CDS do not believe that the entity upon which they are buying protection will actually default. In this, they are similar to investors in stocks. People buy and sell stocks because they think the stock in question will increase or decrease in price. Same goes for CDS.

This doesn't make any sense at all- and the analogy to the stock market is bad. Very bad.

If you buy a share of stock you own a piece of that company- that entitles you to dividends and payment in the event of a sale of the company in addition to possible appreciation. A share basically always has a final buyer as long as the company isn't bankrupt because of this.

A CDS is not like this- its more like an options contract with its expiration date. You only own the rights to payment for a limited, and defined, period of time. This is not the same thing as a stock.

Here is a question for you- if no one thinks that country X will default why would the spread widen? If there was literally zero chance of a default then anyone who was planning on holding collateral X for a period of time would then sell a US CDS on top of it and increase their earnings by 20 basis points. Basically the amount of sellers of CDS would overwhelm the buyers and the spread would never widen. If CDS buyers are doing this then either A- they are idiots or B they expect a bigger idiot to come along and buy from them OR

C. The most likely explanation. Buyers of CDS are counting on deterioration to force the sellers to "cover" their positions, which means in reality that they are expecting the likelihood of default to actually go up (or sellers wouldn't cover, they would just wait for expiration).

12-17-2009 , 02:52 PM

#19

tolbiny

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Quote:

Originally Posted by J.R.

Ok, same point. there is 11 billion of cds. doesn't this indicate a lot of buying and selling?

I don't get why you say this:

Because the value of the CDS is basically 0.1% of the market in US treasuries in notional value- which basically means that 0.001% of the value of the US treasuries market has exchanged hands in terms of CDS. Compare that with CDSes on other items- like MBS- the CDS notional values on US mortgages exceed the total value of all of the mortgages in the US. Hence the action is minuscule.

12-17-2009 , 02:54 PM

#20

tolbiny

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Quote:

Originally Posted by tolbiny

Someone correct me if I am wrong here- but notional value = the value of the contract covered. So if I pay 20 basis points to cover 1 million dollars $2,000 has changed hands but the notional value is 1 million. So in terms of an 11.1 billion dollar notional market at, say, 20 basis points implies ~ 20 million dollars of payments.

12-17-2009 , 03:02 PM

#21

J.R.

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Quote:

Originally Posted by tolbiny

Ok, there was a question about sovereign cds being insanely profitable, and you replied:

Quote:

Isn't the issue the relative bid size spread of the cds, not the relationship to the underlying market? And isn't the point the more illiquid and opaque the market, the more profitable it is to deal cds?

Quote:

Credit default swaps operate like insurance at a bilateral level. That is, if you only focus on the two parties to a credit default swap, the agreement operates like insurance for both parties. But to do so is to fail to appreciate that a credit default swap is exactly that: a swap, and not insurance. Swap dealers are large players in the swap markets that buy from one party and sell to another, and pocket the difference between the prices at which they buy and sell.

http://derivativedribble.wordpress.c...default-swaps/

12-17-2009 , 03:18 PM

#22

tolbiny

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Quote:

Ok, there was a question about sovereign cds being insanely profitable, and you replied:

Quote:

What are CDS spreads on the US? Well under 50 basis points right? So its not insanely profitable to sell them- its marginally profitable when you consider margin/collateral requirements. For a big bank why investigate the CDS market for 30-40 basis points a year when the Fed is giving out 25 basis points a year basically for free?

1. The market is not large
2. The market is obviously not a "big money maker" for sellers of CDS

We can pretty easily conclude that the market isn't opaque. Its just unprofitable. the reasons are

1. For sellers its the opportunity cost of tying up collateral to enable them to sell the CDS
2. For buyers its concerns about counter party risk should they "win" their bet.

Quote:

Swap dealers are large players in the swap markets that buy from one party and sell to another, and pocket the difference between the prices at which they buy and sell.

Some one is still holding collateral, and someone still has counter party risk- going through an intermediary doesn't change that.

12-17-2009 , 03:27 PM

#23

J.R.

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Quote:

Originally Posted by tolbiny

I agree its not insanely profitable, and the reason are the bid/ask spread aren't that big.

I also agree the market isn't so huge that they are making big money on volume. The action is in interest rate swaps, not CDS, in the treasury market (IRS is what the FED proxy banks use to exert pressure on the Treasury market to try to control rates)

But its not a small market, its liquid enough that its not insanely profitable. Its not opaque, right?

12-17-2009 , 03:48 PM

#24

J.R.

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The net sovereign CDS market as of May was not "too big" according to this ZH:
http://zerohedge.blogspot.com/2009/0...eign-risk.html

another:

Quote:

As per the Financial Times, the Gross Notional of CDS outstanding on developed and emerging sovereign debt, by my simple count, was well over $500 billion. Of course, there are many trillion in outstanding sovereign debt, so $500 billion is a small position, but still, it's a large enough number to take pause.

http://www.minyanville.com/articles/...a/25601?page=1

12-17-2009 , 06:07 PM

#25

tolbiny

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Quote:

As per the Financial Times, the Gross Notional of CDS outstanding on developed and emerging sovereign debt, by my simple count, was well over $500 billion

500 billion is a lot- but what are we talking about here? What are the sum totals of CDS for countries that fit our description- ones where payment in the event of a default is dubious at best? Emerging countries CDS should work pretty much the same way as housing or credit card CDS- no individual one presents systemic risk. The US, Germany and Japan though probably do.

Quote:

But its not a small market, its liquid enough that its not insanely profitable. Its not opaque, right?

I would say that the CDS market for US default is very small.

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