The Collapse Of European Risk

The biggest ongoing short squeeze may not be in equity markets, despite all efforts to the contrary, but rather in the risk of Eastern European countries as noted by their respective CDS levels. The chart below demonstrates the massive squeeze experienced by holders of CEE risk, which is quite entertaining considering the biggest risk powder keg by far is contained in this region. Indicatively, spreads have tightened by a massive 46% over the past 2 months which compares with Asia (39.1%), LatAm (21%) and EMEA (25.5%). Curiously Czech Republic risk is the same as China now, at 135 bps!

As always, when technicals (which even in credit markets have lately been crushed) and fundamentals diverge to the point of utter nonsense, it is only a matter of time before another "risk flaring" event become all too likely. And unlike domestic corporates, when you are dealing with geopolitical aberrations, the implications will likely be much worse. And for all those who think the risk is "contained" by the IMF and the WB, please check the successful yields on the recent WB bond offering.

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