The Collapse of Eastern 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.

Comments

[nukldrager:]

Alan Greenspan was in love with credit default swaps and credit derivative options at their inception, because of the effect they have on risk as far as I can tell. But it seems like an abstraction gone wrong at this point. What are they good for? Capital preservation at the highest levels only?

May 03 01:16 PM

[Misha:]

Tyler: You should add Ukraine to the list. It remains at the center of diverging Russian and American interests and political instability ahead of presidential elections later this year.

May 03 03:28 PM

[UbuTranscen...:]

Tyler,

When I was a boy, in the late Pleistocene, we had air raid drills in our elementary school and crouched under our desks in case of a nuclear attack. Considering we were in Washington, D.C., there was more than a little humor in the exercise.

One thing we knew, if civilization were to fall, it would be caused by a Red Menace from eastern Europe. Little did we know that the menace would be red ink...

I'm thinking about how cozy it would be under my desk right about now, Ubu.

May 03 03:45 PM

[Jasper M:]

I think this is a correllary of the low VIX, desPITE the fact that new anti-shorting rules are driving business into puts. It is a sign of monumental complacency. A Lot of market participants are ignoring risk. That doesn't end well.

Historians may look back at these numbers, halfway through the worst market collapse in history, and assume we were of sub-human intelligence.

May 03 04:19 PM

[LKofScotland:]

and yet who has the greatest exposure to eastern europe? the world? the united states? there must be a catalyzing event in order for something "over there" to impact us "over here." this war is far larger than our naturally liberal commentator class has ever let on. should chaos in eastern europe impact our war on afghanistan then it is possible for this to be a catalyzing event, but even then i still don't see this as totally negative as it ultimately impacts europe and oil rich saudi arabia who are wholly dependent on american security to maintain their economic systems. so to this story shouldn't we say, "finally, good news."

May 03 10:06 PM

[meech:]

Ok, so what does that nice chart actually mean for those who have, say, bonds from Ukrainian or Khasakstan banks or local goverments? That we should sell these while prices are high.

As usual, Tyler gives insighful commentary but fails at times to spell out the ramifications of his comments, as if its all too obvious to bother with. Not so far those of us less sophisticated who would like to understand his insights.

Good job, TD, just spell it out a bit more for we the less gifted

May 04 06:48 AM

[Fabien Hug:]

With all the free money printed it's no so surprising to see the biggest risks (the biggest yields) performing so well.

May 04 10:10 AM

[Jasper M:]

AMF
You cite a perfect example of Market Forces Judo -
1) credit gets inflated
2) all that credit seeks new and innovative instruments to flow into. Some of these are good; most are crap.
3) As the inflation saturates and exhausts itself, these same instruments end up becoming instruments of further credit Destruction.
The Inflation is eaten be its own children!
It's like something out of a classical myth.

May 05 02:34 AM