Parsing European and American CDS Data: Who's Doing Worse?

Since August of 2007, when BNP Paribas (BNPQY.PK) froze withdrawals in three investment funds because of losses on CDOs constructed with subprime mortgages, and the world realized that if an institution with no clear link to U.S. housing could be thusly affected, than the everyone was pretty much fair game, there has been constant banter as to whether the U.S. or the U.K. and Europe would be more affected by the crisis and which side of the Atlantic would emerge first. This discussion leaves out of course all the across-the-pond schadenfreudian hopes of big bad America finally getting what it deserves.

Throughout the crisis the pundits have kept score and also kept everyone up on the latest prognostications on who would cross the recovery finish line first.

With so much attention being paid to something that should only matter to the extent that if any region on either side of either ocean gets through this mess, it would be the clearest sign yet that a true global recovery has begun, I thought it interesting that the U.S.A and the E.U. posted exactly the same rate of unemployment for the latest reporting period last week. For all intent and purposes , this makes it a dead heat at this point in the race.

As a recap and to help you handicap, here are the numbers: U.S. Nonfarm payrolls fell 467K in June, May was revised up 8K, average hourly earnings were flat, U6 unemployed (which includes discouraged workers) was 16.5%, average hours worked equaled 33 hours (an all time low) with revisions for earnings and hours worked being revised down for April.

Just in case you can find anything hopeful in those numbers, here are some more: the mean duration of unemployment rose to 24.5 weeks and the median was up to 17.9 weeks. Additionally, 53.5% of those unemployed in June were considered to have lost their jobs permanently which is the highest number in that category since the number has been tracked.

In the Eurozone the 9.5% unemployment rate was the highest in 10 years. Spain led the parade with an 18.7% banner rate, twice that of the E.U. but (do I see a green shoot?) down 1.5% from the previous month. For a little perspective it should be noted that Spain’s claims were 49% higher than in June of 2008.

The ECB, like our Fed recently, decided to keep rates at current levels but the difference here is that our shortest term rate is effectively zero while the ECB’s is 1%.

It should also be noted that non-Obama-administration economists believe that unemployment will peak at around 10%-10.5% some time in 2010 while economists watching Europe think the number on their side will be 11%, also topping out early next year. Given how well these peak rates have been publicized it makes the market’s reaction to the numbers that much sillier.

ECB President Jean-Claude Trichet said he expected euro-zone “economic activity over the remainder of the year to be weak” and that “further deterioration in labor markets” should be expected. When asked if the ECB was considering any further steps to arrest the decline he replied “we consider that what we are doing now is appropriate.”

CDS quotes exist for countries within the Eurozone but not the region as a whole. Given this, I thought it would help to look at Germany as they are the largest economy in the group and Spain because they currently have the highest unemployment rate as well as a peak at how Uncle Sam is doing in the sovereign market.

Germany’s CDS peaked at 92bps in February of this year and has since traded down to 23bps for rising to its current level of 32bps. Spain also hit its high in February but the level was 169bps, a tad higher than Germany. Spain’s CDS closed at 863bps on Friday.

As for the U.S of A., the high for default protection on the most widely held debt in the world was 100bps (priced in Euro’s because if we go the Dollar goes too!) on 2/24/2009. For all of the issuance, we are currently trading just 9bps off the lows hit in mid-May of this year at 35bps as of Friday’s close.

Enjoy the week.

Comments

[whidbey:]

The EU has followed the lead of the US central bank in many things, but not with some reservations. Germany is hurting badly on its export markets with no prospects of a recovery soon. Spain was bound to be hurt given its industrial policies and employment rules. But what it means is the Europe will be slower to recover than the US, if and only if, the US Administration slows its political spending and addresses the deficits so that small business can get capital and access to markets (reduce regulation for gods sake). That is where the jobs and we need to lead in focusing there.

Jul 06 10:27 AM