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Sovereign CDS -- Random Thoughts

posted by Stephen Lubben

Lots of attention on Greece these days, but has anyone noticed that France's CDS has declined more on a percentage basis this year (from 32.05 to 53.40)? Even Germany has seen a bigger percentage decline (from 26.33 to 37.84). And Iceland has completely fallen off a cliff, closing today at 639.42. That's the fourth highest price for sovereign CDS, after only Argentina, Venezuela, and the Ukraine.

Just saying, maybe we're a bit too focused on Greece . . .

Meanwhile, it's been a bit since I've talked about California, but today its CDS was selling for 327, which means that the market currently thinks California is more likely to default than Lithuania (270.80) and somewhat less likely to default than . . . Greece (396.83).

Meanwhile, US CDS is trading at 46.71, which puts us right between Germany and Switzerland (49.21), but we're all in a twitter about the federal budget deficit and debt burden.

Notes:  all prices are for 5 year CDS and come from Bloomberg. CDS prices are in basis points, so that California's price suggests that one would have to pay 3.27% of the amount you want to buy protection against (or $3.27 for every $100 of protection).


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Very interesting observation.

How is a credit event defined for California? Default on any GO bond?


this link is a chart of all sovereign CDS prices, ytd and vs 1/1/08


Didn't Lehman teach us that CDS prices can be much more an indication of counterparty risk than of the risk on the underlying asset? The ABX spiked when Lehman got into trouble. It wasn't as if all the subprime MBS suddenly got in trouble then.

Jim -
Cal CDS requires either a payment default on GO debt or a "restructuring" to trigger a credit event. For cds users, original restructuring is used in municipals.

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