Europe Stands Up for its Sovereign Debt System

Oct. 4, 2011 - PRLog -- Anxieties over the spread of the European debt crisis have heightened and, by all appearances, will infect the world banking system. In confirmation of this, the cost of Morgan Stanley (MS) and Goldman Sachs Group Inc (GS) credit-default swaps (CDS) increased to the highest level of all time since Lehman Brothers Holdings Inc went bankrupt. CDS contracts from the world’s largest retail brokerage network - Morgan Stanley in New York, shot up 92 basis points. Their cost stood at an average of 583 basis points as of 4:30PM, immediately after the close of trading on the New York Stock Exchange, the highest rate since October 2008. Credit-default swaps on the debt of Goldman Sachs also rose 65 basis points; their average cost is now 395 points.

As DT Trading analysts reported earlier, Wall Street’s largest investment banks sought and are seeking Greek debt payments from other Euro zone countries through the American government. It’s difficult to imagine that one of the most successful banks in the world was not able to assess the degree of risk on Greek bonds and didn’t get rid of theirs last year when the first stage of the “Greek tragedy” began. If, of course, purchasing European bonds isn’t covering up a direct interest to play with the debt problems of countries with a low level of financial discipline and cash in at the expense of helping out their neighbors…

Traders pushed up the cost of expenses on protecting against a default of banks and American companies immediately after Germany’s Minister of Finance Wolfgang Schauble expressed disagreement with increasing the Stability Fund and thereby complicating the efforts of European politicians to prevent a Greek default. At the same time, Bank of America (BAC) credit-default swaps shot up to record highs. In general, the derivatives market on the debt of American corporations rose to its highest level since May 2009.

At the same time yesterday, it was reported that the European regulatory authorities are preparing to review the procedure for paying out coupon yields. European governments have hinted that bond holders might have to incur even bigger losses on Greek debt for paying out a second aid package. The problem is that the worsening economic perspectives in Greece will probably require more decisive steps and efforts to quell the financial crisis.

Finance ministers from Euro zone countries have thought through some “technical changes” for transactions in July that call for an “investment” of 50 billion Euro ($66 billion) to the 159 billion Euro rescue fund. This “cooperation” from the private sector includes profit from default swaps and rollovers. “Since the private sector is participating in this transaction, we should recognize that, from the time the decision was made on July 21, the conditions have changed,” said Jean-Claude Juncker, the prime minister of Luxembourg, immediately following a meeting of Euro zone finance ministers. “We are discussing these technical changes.” In this manner, Europe will protect itself and resist attacks from creditors in order to ensure the rescue of the Euro zone and not allow a default on sovereign debts, DT Trading strategists believe. The situation of paying Greece’s annual bills at 130% can’t be aligned with rational financial practice being conducted by the European Central Bank and the governments of the most prosperous Euro zone countries. In any case, Greece’s sovereign creditors and other troubled countries will block it in some form or another.

DT Trading Limited Analytical Department

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