Insurance on French and Austrian 5-year debt paper is rising and it is more than twice as costly to insure these sovereign bonds against default then those of Germany or the UK.
While it is good to know that the level of risk for these bonds is going up, there is still some doubt as to whether holding CDS on sovereigns makes any sense considering that those who held Greek CDS got hung high and dry by government’s claim that the 50% reduction of Greek debt was not a default event.
Since there is some doubt as to whether Credit Default Swaps even matter anymore, some wonder whether another stress metric, Libor-OIS, is little tainted.
The problem may not be with the OIS, the overnight indexed swap, but with the Libor.
“The whole [Libor] system is rigged. The banks are able to say, ‘Let’s just collude and set rates, and we have the sanction of the authorities to do it.’,” says Tim Price, who helps oversee more than $1.5 billion as director of investment at PFP Group.
So, if Libor rates are too low by collusion is the spread narrower?
So we turn to the spread between floating rate agreements and the overnight indexed swap, or the FRA/OIS.
Since May, this metric has more than tripled and it stands roughly half way between 2008 panic-highs.
When this spread was at 27 back in June, Michael Darda was pointing at it as a “stench” of a systemic risk event that could lead to a bank run.
Now that this metric is at 70 and going higher daily, it’s meaning becomes more self-explanatory.