Friday, August 24, 2012

Eurozone improvements


Eurozone 2-yr swap spreads have plunged by 65 bps so far this year, and are now almost back to the levels that preceded last year's flare-up of Eurozone default worries. This tells us that the ECB has been successful in its attempts to inject needed liquidity to the financial system. The risk of major bank defaults has been sharply reduced, and that in turn brightens the outlook for the Eurozone economy. Problems still exist, of course, but the atmosphere of crisis and panic has all but disappeared. Liquid markets have an amazing ability to sort out problems, by allowing participants to distribute risk to those more willing and able to bear the risk. 


5-yr credit default swaps are an excellent indicator of the credit risk of major borrowers. As this chart shows, default risk has dropped considerably over the past year. Spain, Ireland, and Italy are now considered to be better credits than the average junk bond. They are still risky, of course, but at these levels the risks are manageable and attractive to many institutional investors hungry for yields.

11 comments:

Bill said...

What's your take on the Durable Goods report today. Not very good on the Capex portion, right?

brodero said...

Excellent commentary Scott...should be required reading for those wishing to understand the risk within the Eurozone...

Benjamin said...

OT, but seasonal:

The GOP wants to

1. Go back to the Gold Standard
2. Replace Evolutionary Science with Creationism
3. Outlaw abortions, even in the case of rape
4. Boost military spending, even though we now spend $1 trillion a year on the VA, Homeland Security and the Defense Department

Really, this is a party actively courting my non-vote.

Benjamin said...

For what it is worth. copper is trading for almost exactly the same price it was five years ago on this day.

See this chart: http://www.kitcometals.com/charts/copper_historical.html

Dr William J McKibbin said...

@Benjamin, your summary of the Republican platform matches my concerns for the GOP as well -- as a Libertarian (http://www.lp.org), I have a difficult time choosing between the big government Democrats, and the military-industrialists in the GOP -- neither approach is good for America -- moreover, neither the Democrats or Republicans are eager to cut government spending -- either we vote for more government, or we vote for expansion of the military-industrial complex -- said another way, our choices are limited to Democratic socialism, or Republican fascism -- I so wish the Libertarian cause could get traction in the US, but that's not going to happen either -- hence, better to focus on building my estate in what I view as a hostile economic environment under Democratic-Republican hedgemony...

Dr William J McKibbin said...
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Dr William J McKibbin said...
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Ed Barner said...

@ William:
Be careful: http://www.janes.com/products/janes/defence-security-report.aspx?id=1065931663

Stocks: EADS, Rheinmetall (WKN 70300) most oft the Big Player are NOT marked listed. ( Kraus-Maffei-Wegmann , Heckler & Koch )

William said...

Dr William J McKibbin...

"said another way, our choices are ...Democratic socialism, or Republican fascism -- I wish the Libertarian cause could get traction in the US, but that's not going to happen either -- hence, better to focus on building my estate in what I view..."

Well, that was pithy!

The damn problem is the US electorate is almost evenly divided between Republican voters and Democratic voters. Given the Senate's filibuster rule nothing of significance to decrease the deficits will be accomplished unless 60 senators agree.

I think - in the end - only the "markets." have the power to force significant change in the US budget. Unfortunately, it will come at a very high cost to everyone's estate. Take a look at Italian and Spanish bonds and equities, not to mention those of Greece.

Timing will be key!

Benjamin said...

Dr. Willaim:

I enjoy your posts and share your frustration in finding a party that actually stands for something.

The best summary I have heard is that you can vote for the socialists (D) or the national socialists (R).

Too cynical? I hope so, but the empirical evidence.....

Benjamin said...

BTW, the DJIA is up more than 40 percent since Obama took office. It fell by roughly the same amount in the eight years that Bush and the GOP more or less ran DC (2000-2008).

I am no fan of Obama, consider him the picture of conventionality and mediocrity (oh, his IQ might by high, and his is a sincere nice guy---but then so again was Jimmy Carter).

Still, it makes you wonder.