Wednesday, May 19, 2010

Germany's Act of Desperation: Shock and Awe for Whom?

Yesterday, Germany Banned Naked Short-Selling at Midnight and Politicians Declared War on the Markets. http://globaleconomicanalysis.blogspot. ... naked.html

Today, the markets responded with a shock and awe of their own. Please consider Swaps Soar on Germany’s ‘Act of Desperation’ http://www.bloomberg.com/apps/news?pid= ... %7Corder:3

Credit-default swaps soared 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 surged 50 basis points to 582, according to Markit Group Ltd., while the Markit iTraxx Asia index on investment- grade borrowers outside Japan climbed 10 basis points to 131.5, Royal Bank of Scotland Group Plc prices show. The jump in the indexes signals a deterioration in investor perceptions of credit quality.

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.

Sovereign CDS

Credit-default swaps on Europe’s most indebted governments fell initially on concern the restrictions on short-selling will devalue existing agreements. They erased those declines as it became clear Germany failed to persuade other nations to join in the ban. A Europe-wide prohibition on the practices is “doubtful,â€