Bloomberg's chart of the day (below), and the accompanying article is somewhat troubling. For what seems like the first time in mainstream media, someone acknowledges the truth: "The U.K. Government may lose its top AAA credit rating after taking a 70% stake in Royal Bank of Scotland, credit-default swaps show."
Reporter Abigail Moses may have opened a can of worms here, namely "calling a spade, a spade." While a convergence of CDS spreads does not imply much anymore, as trading these days is more based on technical considerations than fundamental valuations, the persistent move wider in sovereign CDS is troubling. With the recent S&P rating actions on Spain and Greece, a potential plethora of downgrade events could start soon. "The market is faster in anticipating events than rating agencies (Ed. um, we agree wholeheartedly) and credit-default swaps indicate downgrade pressure on the U.K.," said Jochen Felsenheimer, co-head of credit at asset manager Assenagon in Munich. "But you should not forget that the market is in panic mode."
Of course, the whole "domino-effect" we speculated about in our Greece post would become even more tangible. But just talking about it at least makes people consider the possibility and the potential outcomes, and we applaud Abigail for this...The Guardian has done a good detailed analysis on the whole issue of sovereign defaults here. The other question remains: who benefits if you bought CDS protection on the U.S. or U.K. and the countries can not deflate their way out of trouble and default... Who pays for your protection purchase then? In other words, when the apocalypse hits, where will you spend your shorting profits.
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