A Greek Tragedy of Shakespearian Proportion Continues to Unfold

After a week of credit market histrionics, Monday morning ushers in a moment of calm…

Greek spreads ease; Portugal under pressure – WSJ

WSJ reports European sovereign CDS spreads were generally tighter Monday, with the cost of insuring Greek and Spanish debt against default falling, although Portugal remained volatile with spreads widening. According to CMA DataVision, Greece’s five-year sovereign credit-default swap spreads—a key measure of credit risk—moved back below 4.00 percentage points in early trading Monday to be quoted at 3.97 percentage points. That’s around 0.1 percentage point tighter than Friday’s close of 4.07 percentage points. That means the annual cost of insuring €10 million ($13.7 million) of Greek government debt against default for five years had fallen €10,000 to €397,000. The pressure on Spain also eased slightly, with the country’s CDS spreads tightening around 0.05 percentage point to 1.61 percentage point, according to CMA. Portugal, however, bucked the trend with the cost of insuring the country’s debt against default for five years rising to 2.34 percentage points, against a close Friday of 2.27 percentage points, according to CMA.

However, this calm is most likely the eye, as opposed to the end, of the hurricane. Speculation runs rampant as to the cause of the Greek tragedy…

 Two Hedge Funds One Bank? Is There A Concerted Effort To “Destroy” Greece?

In the pre-math of the Greek collapse, conspiracy theories are swirling about who keeps blowing Greek CDS spreads wider. The answer, so far completely unconfirmed, is that a large US investment bank (we “wonder” just which US investment bank dominates the sovereign CDS market), and two major hedge funds are behind the CDS “attacks” on Greece, Portugal and Spain. According to Jean Quatremer, and his Coulisses de Bruxelles, UE blog, the plan involves blowing spreads to record levels, and is prompted by the hedge funds’ anger at not having been allocated substantial amount of the recent €8 billion GGB issue, in order to lock in profits from their CDS long exposure. Being thus unhedged with a short bias, their alternative is to continue buying protection else risking to mark losses on their extensive CDS short risk exposure. Read more…

While the previous story sounds plausible and is certainly entertaining, a more pressing and definitive issue plagues Greece….

ZeroHedge: The latest escalation in the Greek crisis comes courtesy of Greek daily Banking News which notes that the latest nail in the Greek coffin comes from formerly major Greek players, Deutsche Bank and Unicredit, which over the past 2-3 weeks have ceased accepting Greek collateral and have pulled out of the Greek repo market altogether….

…Yet even as Greece is concerned about collateral eligibility with the ECB in 2011, the sad truth about its precarious and increasingly non-existent collateral exposure will come much earlier than that. Gradually, the country is becoming financially isolated: if the repo market collapses it is certainly game over as no semi-developed country can continue to exist without this core pillar of the shadow economy. In the meantime the vultures keep on circling.

About Bret Rosenthal

Interpreting the news that moves markets. Principal of RCM, LLC, and founding partner of the Fortune's Favor Family of Funds
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