UBS analysts quote that Credit Market started to price a complete different scenario this week.
The complete absence of coordination and leadership in Europe gives suddenly some probability to a non controlled default of Greece and contagion across Europe.
After months of crisis the finance ministers of the Eurozone declared earlier this week they had no idea what to do.
German politicians are now unanimously entrenched and looking at their own borders and electors, they are no longer afraid of expressing their opposition to the Ecb’s views.
We can see signs of the crisis going into a systemic mode, not just in credit.
Tensions on Eur/Usd funding fuelled by fear of a fly to quality, Spanish cash bonds down 2 points, Italy treasuries trading at their wides vs Germany, vol across assets trading up, etc…
Suddenly a country with less than 2% of Europe’s GDP is causing a 500 millions habitants economic and political zone to derail.
Why the sudden acceleration?
Just because ahead of taking the decision in July to help or not Greece we have no one defending the euro project loud and clear, no political vision, no expressed willingness to do so, no coordination, no leadership.
It has been so badly spin out that we end up with Greeks rioting against the rest of Europe making efforts to send them cash, how absurd?
Liquidity reduced, this morning it felt like one of these 2008 mornings, with clients having to state their interests and wait in a queue-list in case an unexpected buyer come to fill their interest.
Sovx traded initially with a 30bp b/o in the street reflecting the despair and fear of gap risk both ways.
Gap Risk…That’s also why activity and liquidity reduces. We are in a no man’s land, there is no obvious trade now away from buying volatility.
It could still gap both ways:
US HFs bought a lot of protection in Europe to hedge their falling CMBS and HY portfolios earlier this month, lot of cash has been waiting to be invested with real money, new issuance has been very low this year.
Components for a squeeze are in place, but at the same time, Banks CVAs and dealers are increasingly nervous and over exposed, trading desks lose money everyday, Hfs perfs are almost all in negative territory.
Ahead of the week end it won’t be possible to stay short so a rebound is expected and already started at the end of the day, but it is more and more difficult to imagine what form would a miracle takes as no one is taking the lead to sort this out.