Sovereign risk is still lurking around the corner. As we hear about large states like Illinois entering into insolvency, we should probably keep an eye on the bigger picture. Unfortunately for Greece, they have not been able to leave the spotlight. With a sovereign CDS level spiking to 343 bps, traders are speculating that there is about a 25% chance they will default within the next five years. As we learned with Lehman, Bear Stearns, Merrill, Countrywide, CIT Group, Washington Mutual, etc., when the target is on your back the death comes quickly. The interesting aspect to consider is what would a default of Greece mean? Since Greece is part of the EU, how will that affect the other European Union members? How can a group of countries inflate away debt for the benefit of one or two members or does it mean the dissolution of the European Union entirely? Is it s a self-fulfilling debt spiral?
Greece at 340bps, but Ireland, Portugal, and Spain spiking to catch up
For now we can only watch with awe as we witness developed countries come to their knees. It just seems that we should all be wondering whether the sovereign default dominoes will topple over like the consumers that they tried to bail out.
Developed nations burdened with debt
This will affect currencies, so be sure to look at hedging your exposures by going long currencies with low debt burdens and subsequently low spreads/default probabilities. Norwegian Krone anyone?
