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[Dreaded_Estate]

What would happen if a member of the euro area could no longer finance its debt?
“FORD to City: Drop Dead.” That famous headline from the Daily News ran after President Gerald Ford refused to bail out New York City in October 1975, when the city was close to bankruptcy. Within weeks Ford relented. Behind the belated rescue lay a fear that default by New York would hurt the credit of other cities and states, and perhaps of America.

Similar worries are now being expressed about the euro zone, in light of the standstill request by Dubai World. That the firm had financial troubles was known, but many investors had assumed its debts were backed by the government of Dubai, and ultimately by Dubai’s oil-rich neighbour, Abu Dhabi. There are similar ambiguities within the euro bloc. If countries with rickety public finances, such as Greece, Ireland and Spain, ever found themselves unable to refinance their debt, would other euro members with deeper pockets rescue them? If not, would default by one euro-zone country threaten the viability of the euro itself?

There are few signs of an imminent funding crisis. Yields on the ten-year government bonds of Greece and Ireland, the two euro-zone countries with the largest budget deficits, are a bit below 5%. That is steep compared with the yield on German bonds, at 3.1%, but hardly indicates a buyers’ strike. When investors were last so nervous about the credit of the euro-zone’s periphery, in March, countries were still able to tap bond markets. Greece, for instance, raised €7.5 billion ($9.4 billion) in a single ten-year bond issue, though it had to offer a coupon of 6%.

The worry is that such appetite for risk may not last forever. The euro-zone countries with the most fragile public finances also have worryingly high unit-wage costs. Poor wage competitiveness makes it harder for them to grow quickly and to generate tax revenue. Currency devaluation is the usual remedy for that ill, but is not an option for countries locked inside the euro.

contd.....

[Dreaded_Estate]

Did the events of last week in Dubai really send jitters through emerging markets?

Here’s something to ponder in the emerging vs developed market debate — an issue aptly summed up in Deutsche Bank’s 2010 outlook on Wednesday. On Thursday, Fitch Solutions has provided an update of its sovereign CDS liquidity indices — and they show that liquidity in CDS for developed markets surpassed that of emerging markets in the last week of November:



As a recap, and in general, the more liquid a sovereign CDS is, the more it is showing signs of financial stress, possibly combined with a significant amount of outstanding national debt and/or changes in its capital structure. Relatively liquid CDS is also a hint that there is agreement within the market about present value, but disagreement about future value due to heightened uncertainty surrounding the country. According to Fitch the liquidity scores of assets have historically traded between four at the most liquid end and 29 at the least liquid end.

Here’s what Fitch says in their Thursday update:
Liquidity on the Developed Market Sovereign CDS index surpassed that of the Emerging Market Sovereign CDS index in the last week of November despite the concerns surrounding the debt restructuring of Dubai World. This highlights that the CDS market now sees more uncertainty around the future of developed economies in aggregate than emerging ones. Although the top 10 most liquid sovereigns are all from the emerging market index, overall liquidity in this index has only marginally increased compared with the significant increase in the developed market index. The increase in liquidity of the developed market index has been driven by persistent market uncertainty about the strength of economic recovery, and the sustainability of higher levels of debt to GDP in combination with lower tax revenues.

You can see the full country-by-country breakdown in the table below. Austria, Ireland, Finland and Sweden look to have had the biggest increases in CDS liquidity over the last year. While Australia, Iceland and the UK look to have had the biggest decreases:



If you’re wondering why the UK and Iceland have had the biggest decreases in liquidity, Fitch Solutions’ offers up an explanation based on its CDS market-implied ratings, which provides a sort of market indicator, using CDS spreads, to indicate which rating band an entity is trading in.

On that basis implied ratings look like this:

[kerrynorth]

The facts are a b.itch are'nt they. I have been wondering why Ireland has any kind of A rating for some time now.

[HarshBuzz]

The facts are a b.itch are'nt they. I have been wondering why Ireland has any kind of A rating for some time now.

tradition; the agencies are always miles behind the curve when it comes to sovereign ratings

[SideysGhost]

The facts are a b.itch are'nt they. I have been wondering why Ireland has any kind of A rating for some time now.

Cos everybody expects that the rest of the Eurozone will bail us out if we can no longer pay our debts ourselves.

The minute there's a credible suggestion that the rest of the Eurozone won't cover our profligacy then the game will be up, instantly.

[KingKane]

Can ye at least make some effort to provide thread titles that will convey some meaning to people looking at them?

[HarshBuzz]

Cos everybody expects that the rest of the Eurozone will bail us out if we can no longer pay our debts ourselves.

The minute there's a credible suggestion that the rest of the Eurozone won't cover our profligacy then the game will be up, instantly.

yes, I'd love to be a fly on the wall when our '12 days off' master plan is being discussed at the ECB

think infamous German ambassador speech multiplied by a million

[eyeswideopen]

A tough-love bail-out would still need someone with deep pockets to provide the cash. Given the state of public finances even in more stable countries, such as France, that cannot be taken for granted. Germany is better placed but would be unwilling to act alone. Could a defaulter remain in the euro? It is hard to see how it could leave. A country that had just lost the trust of investors in its fiscal rectitude could scarcely build a credible monetary system from scratch. There is no obvious means to force a miscreant out, since euro membership is designed to be irrevocable. How badly the euro’s standing would be hurt by a default would depend on the state of public finances elsewhere: if America were struggling too, the dollar might not seem an attractive bolthole. If the current struggles with a strong euro are any guide, euro members might even half welcome a tarnished currency.

From the Economist link in the OP.

[SideysGhost]

Can ye at least make some effort to provide thread titles that will convey some meaning to people looking at them?

I thought it was funny myself, and had a pretty good idea it was going to be about our CDS rates and sovereign default...

[evercloserunion]

I don't understand, are implied ratings the ratings that each nation now actually has? Or are they just based on trading, and unconnected to the agency's actual forecasts for that nation? At the start of the month Fitch said they didn't expect to be downgrading us past AA-.