Posted on 01/26/2009 5:35:07 AM PST by TigerLikesRooster
Government Risk Rises: Credit Markets Face Structural Collapse
by: Rakesh Saxena January 26, 2009
As credit default swap spreads for 5-year British government debt rose to 150 basis points last week, one European regulator raised a significant concern regarding the balance sheets of banks on both sides of the Atlantic. "If you follow the rating agencies, well and good, but if you apply default risk prices to banking assets, capital adequacy ratios of nearly all western banks are open to question," she warned, after watching Euro-based spreads on U.S. government debt rising to 75 bps, and after noting that few CDS price-makers were willing to provide firm quotes for longer-dated sovereign reference instruments.
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Also, with the unprecedented amount of sovereign debt (and sovereign guarantees) required for all the bailouts and rescues, the old "countries-don't-default" maxim has become an acceptable subject for debate.
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Needless to emphasize, as the relatively liberal interpretation of the definition of sovereign default gathers momentum, those pricing credit default swaps will be encouraged to take spreads on U.S. government risk well into the 150-200 bps range over the next few months, for three reasons. Firstly, there is not enough evidence yet to show that the latest round of stimulus packages will achieve, in part or whole, their lofty objectives.
Secondly, CDS dealers are slowly warming up to the possibility that the Obama administration will simply introduce another bailout package, for another hundreds of billions of dollars, if economic conditions worsen in the second half of 2009. And, thirdly, if CDS spreads (and related default probabilities) on government risk are applied to the valuation of assets within the banking and insurance industry, the "systemic risks" Fed Chairman Ben Bernanke talks about are still very much intact.
(Excerpt) Read more at seekingalpha.com ...
Ping!
Just the tip of the iceberg, my FRiend.
The next battleground...
Other shoe to drop soon everyone on the beg-o-thon boat.
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