Is Cyprus the New Lehman?

Discussion in 'Economics' started by Cdntrader, Mar 17, 2013.

  1. Is Cyprus the New Lehman?

    lets see where tough action gets the EU. Perhaps a cascade of dominos a la Lehman?
  2. zdreg


    as if the US is immune. the US is probably in worse shape as its deficit continues too expand.
  3. When Greece bad news come up, it is folled with more bad news from Spain, Italy, .... Tighten your belt and be ready for a market turbulance.
  4. Greece has more than 11 times the population of Cyprus and when they mention Cyprus they mean Greek part of Cyprus not even the entire island, after all the Greeks ( Greeks in Greece) have already rioted to no avail. Unless there is contagion this is not a Lehman, its a very small regional bank going under effect.
  5. i am sure the s&p will be up 20 points tomorrow though haha. they are taxing people who just saved money to bailout banks so they can give out big bonuses again. when i read about it i just scratched my head and said how does the stock market just go up with all this bad news out there.
  6. Worst possible scenario; to announce a grab and then waffle about it. I love anarchy. My only wish is that I'd had more shorts in place.
  7. Cracks Starting to Appear in Solid Italy Bond Market
    Chinks are showing in the Italian bond market's resilience to the political stalemate that followed last month's election.

    Backstopped by the European Central Bank's bond-buying pledge, Italian yields have been relatively steady at levels well below their all-time highs since the February 24-25 vote which left parties deadlocked over how to form a government.

    But some potential signs of market stress are emerging.

    Italian bonds paying lower rates of interest have outperformed higher-coupon paper of similar maturity in recent weeks - a phenomenon that occurs in times of heightened uncertainty, when investors take defensive positions.

    "It is one of the crisis barometers," said Commerzbank rate strategist David Schnautz. "When you have stress in the system you see certain dislocations, switches in the curve."

    While yields on the two types of bonds are similar, those offering smaller coupon payments are generally cheaper to buy, reducing the potential loss for the investor if the issuer cannot repay its debts.

    A sovereign borrower with liquidity problems would also be more likely to delay coupon payments than not redeem the bond at maturity, analysts say.

    The discrepancy in price is most visible at the longer end of the Italian debt curve, where the difference between coupons is also wider.

    A bond maturing in August 2023 and carrying a 4.75 percent coupon was priced at 101.53 cents in the euro this week, while a November 2023 bond paying a coupon of 9 percent was priced at 134.87 cents in the euro.

    The August bond has outperformed in recent weeks, widening the difference in yields between the two bonds so that the higher-coupon November paper currently offers investors an additional return of about 21 basis points.

    That is the biggest differential since early January and a jump from just 10 basis points - the smallest gap since December 2010 - before last month's vote, although still well off wides of more than 100 basis points hit at the end of 2011.

    Then, with former Prime Minister Silvio Berlusconi still at the helm, Italy's borrowing costs soared to unsustainable levels and markets feared its debts would spiral out of control.

    Yields have since fallen sharply, with the ECB's as-yet untested pledge in September to buy bonds of euro zone countries that seek aid underpinning valuations.

    "In the old days the difference was very pronounced. I'm not saying we're heading towards that now, I'm just saying it's something we need to watch," Schnautz said.

    In France, regarded by investors as one of the euro zone's safest credits, the yield differential between similarly-dated bonds has been more stable.

    The spread between an April 2023 bond with an 8.5 percent coupon and a 4.25 percent October 2023 bond has held within a 17 basis point range for the whole six years the two bonds have been neighbors on the curve.

    Investment Opportunity

    Credit Agricole rate strategist Peter Chatwell said that while low-coupon bonds can indicate debt market tensions, the steepness of the Italian curve - the difference between short-dated and long-dated yields - suggested limited stress.

    A steep curve is seen as healthy as it shows investors do not see an immediate risk of default. An inverted curve, when short-dated yields are higher than the long-dated ones, is the clearest sign of a distressed debt market.

    The spread between benchmark 10-year and two-year Italian bond yields was last 284 basis points. At the height of the crisis in 2011, the spread was negative at almost minus 50 bps.

    "When there was a big bear flattening of the curve there (were) switches out of high-price paper into lower-price paper ... which could be due to a perception of an inflated risk of default," Chatwell said.

    "It's wrong to do that in this environment and we've flagged it as an opportunity for investors to buy the higher coupon bonds."

    Italy could see its borrowing costs rise above those of troubled Spain this week, analysts told CNBC on Monday, with a credit rating downgrade on Friday and continued political deadlock posing an ever larger threat.

    "Italy is really going to blow it up this week," Joe Rundle, head of trading at ETX Capitol, told CNBC. "There is the downgrade that happened on Friday but now there is the Italian yield and the spread narrowing to the Spanish yield and there is the possibility that Italy gets more expensive than Spain. The last time we saw that we were in the middle of a euro zone crisis," Rundle told CNBC Europe's "Squawk Box".

    Rundle added that while political uncertainty lived on in Italy, there was the potential for Italy to "come unwinding very quickly."

    On Sunday, Beppe Grillo's anti-establishment 5-Star Movement reiterated that it wanted to lead Italy's next government rather than form an alliance with any other party.

    Grillo's comments followed a credit rating downgrade of Italy by Fitch on Friday. The country was downgraded to BBB plus with a negative outlook. The downgrade was attributed to inconclusive election results in February that have led to a power vacuum and delays to structural reform as no one party gained a majority to form a government.

    (Read More: Nouriel Roubini: Italy a 'Tsunami' Risk)

    As markets opened on Monday, the FTSE MIB was down 0.5 percent. "We could see these gains we've seen in the last few weeks come off very aggressively," Rundle said. "I think the Italian yield is likely to blow up while the Spanish yield falls and Italy becomes the bad boy of Europe more so than Spain now, so that is where I think the risk is this week," he added.

    Italian 10-year bond yields rose 7 basis points on Monday morning to 4.65 percent. Spanish ten-year bond yields fell 3 basis points to trade at 4.73 percent.

    "Credit markets continue to underestimate the risk of political instability in Italy and in the periphery, and the calls for a switch from a pro-austerity fiscal compact to a growth compact," research analysts at RBS said in a note on Monday.

    "We think these risks will emerge more strongly as the possibility of new elections in Italy becomes reality – which is no earlier than May 15. In the meantime, credit spreads will likely continue to tighten after February's indigestion, as both technicals and growth data remain supportive of the asset class," the analysts continued.

    Analysts at Bank of Tokyo Mitsubishi played down the impact of the Fitch downgrade, however.
    "The Fitch ratings is still three levels above junk and one above Spain. The one to watch from here is Moody's which has Italy rated at Baa2 leaving just one further level before junk status. S&P has Italy rate at BBB . The Italian 10-year yield over Germany has widened by about 10bps this morning and the reality is that the financial markets reassess sovereign risks on a daily basis and hence, the decision of Fitch is unlikely to have a notable impact on yields or the euro," the bank said in a note to clients.

    The Italian Minister of Economy and Finance, Vittorio Grilli, told CNBC that he was confident that a solution could be found for Italy's political stalemate, though he conceded that structural reforms were needed soon.

    "I am confident that Italy will be able to provide a solution... I think that will be a positive outcome that will be judged by the markets," he told CNBC at the Ambrosetti forum in Italy.

    "Of course, [the] international community and markets like certainties not uncertainties, so the faster we are able as a country to provide certainly and so clarification about the political and administrative future of Italy the better it is," Grilli told CNBC on Saturday after the downgrade.

    (Read More: Italy Elections Could Derail Economy Further)

    Grilli denied that the country, which Fitch predicted would see its debt peak at 130 percent of gross domestic product (GDP), would need to resort to financial aid from Europe in the form of the European Central Bank's bond-buying program, calledOutright Monetary Transactions (OMT).

    "Well our position and my position, the [Monti] government's position has been that Italy doesn't need an OMT program, we don't need the funding… It's not a question of funding, it's a question of pursuing a structural reform program that we have started. A large and important country such as Italy has to find the strength within itself to pursue those reforms," he added.
  8. i went long on friday evening :( :mad:

  9. gutsy move!!!

    but I wonder if you're courageous enough to show us the screen capture of the trade! show us you really walked the talk!!!
  10. lets hope EU run by psychopoliticians will finally go kaput.
    #10     Mar 17, 2013