"It has been long in coming but finally the credit market is noticeably
refocusing its attention to the two countries that are supposed to carry the
burden of bailing out the world on their shoulders: Germany, and, that perpetual
placeholder for global rescues, China. As noted yesterday, while following
today's anticipated ISDA decision to effectively make price discovery in CDS
null and void, and in the process also put the whole premise of sovereign debt
insurance into doubt, CDS still provides a very useful metric courtesy
of the DTCC, namely open interest, or said otherwise, gross and net notional
outstanding in the CDS. And while we will reserve the observation that not only
did ISDA kill sovereign CDS, but in the process it also ended bilateral netting
effectively pushing up net CDS to the level of gross, we will highlight that as
of the last week, net notional in both German and China CDS has hit a record, of
$19.6 billion and $9.3 billion, respectively. This is occuring as notionals in
the two most active countries to date, France and Italy, have been declining. In
essence, what the CDS market is telling us is that while the easy money in
French and Italian default risk has been made, it is now finally the turn of
China and Germany to defend their credit risk and sovereign spreads. We expect
that if China is indeed confirmed to be the backstopper of Europe through
funding the EFSF in whole or in part, that while its CDS may or may not surge,
net notionals will continue to increase as it means that ever more are laying
insurance, as hobbled as it may be, on the country which recently was forced to
bail out its own banking system, let alone Europe. Keep a close eye on China,
which while the bulk of the market is taking for granted as the global rescuer
of last resort with hard money, the smart money is already positioning itself
for the next big disappointment..."
at http://www.zerohedge.com/news/attention-finally-turns-two-ultimate-backstoppers-world-germany-and-china
at http://www.zerohedge.com/news/attention-finally-turns-two-ultimate-backstoppers-world-germany-and-china
