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Swaps Soar On Germany’S ‘Act Of Desperation’: Credit Markets

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May 19 (Bloomberg) -- Credit-default swaps rose as German Chancellor Angela Merkel’s curb on using the contracts to speculate on European sovereign debt sparked concern among investors about increasing government regulation.

The Markit iTraxx Crossover index of swaps on 50 European companies jumped 37 basis points to 569, according to Markit Group Ltd. The index typically rises as investor confidence deteriorates.

Merkel’s coalition stopped traders buying default protection on government bonds they don’t own, so-called naked swaps, as German lawmakers prepare to debate a bill authorizing a $1 trillion bailout to backstop the euro. The unexpected ban, done independently of the European Union, came after the rescue package failed to stop the 16-nation common currency from weakening to a four-year low and as banks became increasingly reluctant to lend to one another.

“The market sees an inadequate policy such as this as an act of desperation and a refusal to address the fundamental problems at hand,” said Brian Yelvington, head of fixed-income strategy at Knight Libertas LLC in Greenwich, Connecticut.

Prohibiting speculation in the contracts may cause trading in swaps tied to Europe government bonds to freeze up, said Tim Backshall, the chief strategist at Credit Derivatives Research LLC in Walnut Creek, California. Trading limits may increase borrowing costs or limit the flow of capital, he said.

Looks like they are failing to reassure the markets. Get out out while the gettings still good!

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OK, this is from yesterday afternoon, when the US markets had their usual overexcited reaction in the face of something they don't understand.

The quote

said Brian Yelvington, head of fixed-income strategy

says it all.

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Amazing to see the divergence on opinion between the MSM and commentators like Deninnger...

http://market-ticker.denninger.net/archives/2331-The-German-Government-Has-Had-Enough.html

It appears that the German Government has just plain had enough of the crap that the banksters have tried to pull, and has decided to do what Barack Obama should have done in early 2009.

Given its the MSM and they do everything they can to impoverish the sheeple, i guess id side with KD.

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why would you buy a swap in an asset you hold? surely you sell and buy something else.

Or is a swap a pure bet by a non participant?

like a naked short...you have no skin in the actual game, but the market doesnt differentiate....something wrong with swaps and naked shorts then.

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Looks like they are failing to reassure the markets. Get out out while the gettings still good!

no, they are failing to reassure the speculators.

not quite the same

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From MoneyWeek

"Germany announced a ban on short-selling certain financial stocks and also on betting against European government bonds using credit default swaps (CDS)."

CDS were a useful indicator of governments in trouble, is this just a way to stop that indicator being public?

And if you kill the current CDS market for Euro gov debt, then will the market for these instruments just move outside the EU?

VMR.

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why would you buy a swap in an asset you hold? surely you sell and buy something else.

Or is a swap a pure bet by a non participant?

like a naked short...you have no skin in the actual game, but the market doesnt differentiate....something wrong with swaps and naked shorts then.

A swap is insurance, except:

1. It isn't regulated like insurance, so it's cheaper;

2. You don't have to have a material interest in the insured. So, it's in your interest to buy a CDS on a building which you don't own, and then start handing out petrol and matches like confetti.

What should happen:

1. All CDSs should be traded on an exchange which makes sure that the "insurers" can pay if push comes to shove;

2. CDSs should only pay out to the extent that you have the underlying bonds.

Peter.

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CDS were a useful indicator of governments in trouble, is this just a way to stop that indicator being public?

that would only be the case if the risk to short sellers of short selling the debt is sufficiently high that if they get it wrong they bear significant costs.

because its so easy to speculate really short term the effect is distortion, not price discovery.

holding a short position on european debt to which one is locked into for a good period of time, now that would be price discovery.

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From MoneyWeek

"Germany announced a ban on short-selling certain financial stocks and also on betting against European government bonds using credit default swaps (CDS)."

CDS were a useful indicator of governments in trouble, is this just a way to stop that indicator being public?

And if you kill the current CDS market for Euro gov debt, then will the market for these instruments just move outside the EU?

VMR.

D'ya think?

Or is it just an easy way to make money for CDS writers and financial terrorists who want to move price in the underlying?

If you don't want to buy or hold Greek bonds - Don't buy the fecking bonds! End of. If you hold them and you don't want them - stop moaning about it and sell them!

The CDS market is out of control and on the rampage. Just like AIG were out of control and we saw what happened with that.

This is about trying to monetise CDS and create massive profits out of nothing. They should be illegal - the sooner the better.

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2. CDSs should only pay out to the extent that you have the underlying bonds.

That's actually mostly already the case. In the event of a default, the holder of the CDS has to hand over the underlying assets to the insurer since there may well be - usually is - some recovery value. In the case where more CDSs have been sold than underlying assets exist, ISDA arranges an auction process to set a price and the insurers only pay out on the difference between that and the par value.

I'm inclined to agree with what I assume you meant though, to buy a CDS you should first have to own the asset (or maybe expect to own the asset on the day the contract comes into force) and the contract should become void if, at any point before maturity, you cease to own the asset.

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I'm inclined to agree with what I assume you meant though, to buy a CDS you should first have to own the asset (or maybe expect to own the asset on the day the contract comes into force) and the contract should become void if, at any point before maturity, you cease to own the asset.

Of course I did ;)

Peter.

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Looks like they are failing to reassure the markets. Get out out while the gettings still good!

Underlines the lack of foresight that Euro partners showed in their dash to the single currency.

Monetary union without economic union was always doomed to fail.

Economic union is impossible because of the cultural differences between north and south Europe.

The cultural differences are borne from differing geographic and climatic conditions. :)

Having Greek, Spanish, Portuguese bonds worth less (and hence yielding more) then other countries when they

share the same currency is illogical, in my eyes. They're all Euros for Christ's sake.

Maybe the only answer is to ban the second-hand sale of all Government debt. Force buyers to hold it until maturity but sell

more short term bonds.

That would end speculation.

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Underlines the lack of foresight that Euro partners showed in their dash to the single currency.

Monetary union without economic union was always doomed to fail.

Economic union is impossible because of the cultural differences between north and south Europe.

The cultural differences are borne from differing geographic and climatic conditions. :)

Having Greek, Spanish, Portuguese bonds worth less (and hence yielding more) then other countries when they

share the same currency is illogical, in my eyes. They're all Euros for Christ's sake.

Maybe the only answer is to ban the second-hand sale of all Government debt. Force buyers to hold it until maturity but sell

more short term bonds.

That would end speculation.

Local government bonds in the US all attract different rates. All in the same currency.

Indeed, I dont know if you noticed, but some credit cards offer different rates too.. and savings accounts., yet many are in the same currency.

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Underlines the lack of foresight that Euro partners showed in their dash to the single currency.

Monetary union without economic union was always doomed to fail.

Economic union is impossible because of the cultural differences between north and south Europe.

You are wrong it was all well planned and the second phase of the union is just being implemented now.

The turmoil was started also to force the economic union.

It's currently being layed out, see the other thread:

http://www.housepricecrash.co.uk/forum/index.php?showtopic=143307

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The problem is Merkel only banned it for the stocks of 10 big German banks and for European bonds, not for anything else.

Which is in itself a sop to allow the banks to go on screwing with other companies.

Edited by OnlyMe

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I agree. Short selling has existed as long as the financial markets themselves. It didn't cause the crises and banning it won't prevent the next.

Short selling is NOT THE SAME as 'naked' short selling. naked short selling is fraud which should have nver been legal.

You are confusing the two.

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Markets point out the kings with no clothes. If the respective sovereign economies were doing well and had manageable debt, there would be no short selling. All this is doing is allowing politicians to pretend its all ok.

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Markets point out the kings with no clothes. If the respective sovereign economies were doing well and had manageable debt, there would be no short selling. All this is doing is allowing politicians to pretend its all ok.

I guess a good shaking always will reveal the weak. Much like, I suppose, we should applaud the existence of burglars for revealing the underfinanced or uninsured in the street that struggle to replace their furniture?

Not sure how they add value to the general economy though?

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http://globaleconomicanalysis.blogspot.com/2010/05/germanys-act-of-desperation-shock-and.html

"BaFin itself said two months ago it found “no evidence” that credit-default swaps were being used excessively to speculate against Greek bonds. Depository Trust data “do not support the conclusion that speculation is taking place on a massive scale,” the regulator said in a March 8 statement on its Web site."

Read that last paragraph closely.

BaFin put the ban on short selling even after it announced that it found “no evidence” that credit-default swaps were being used excessively to speculate against Greek bonds.

Is that an act of desperation or panic? How about both?

Mish's view on it.

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That's actually mostly already the case. In the event of a default, the holder of the CDS has to hand over the underlying assets to the insurer since there may well be - usually is - some recovery value. In the case where more CDSs have been sold than underlying assets exist, ISDA arranges an auction process to set a price and the insurers only pay out on the difference between that and the par value.

In fact there are usually two options. The first one is described above, you deliver the defaulted loan. The second one is purely payment of compensation. So you can enter into such 'synthetic' swaps without owning the asset.

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In fact there are usually two options. The first one is described above, you deliver the defaulted loan. The second one is purely payment of compensation. So you can enter into such 'synthetic' swaps without owning the asset.

Yes, that's the ISDA auction process I was referring to - or has someone invented a CDS where the recovery value of the defaulted asset is taken from some independent source in the cases there isn't an ISDA auction to go off?

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