The cost of eurozone disunion is 55bps, Deutsche says

[ASusilovic]

Here’s a CDS curio for you to ponder this Tuesday.

The analysts on Deutsche Bank’s fixed income team have done some number-crunching/modeling and come up with some interesting perspectives on how eurozone CDS stacks up against the US and UK.

If you’re interested in the methodology used, click here to see it. To keep things short though, we’ll just say the analysts have constructed a sort of deficit indicator, made some fiscal adjustment estimates, and linked the two to CDS spreads of individual euro-area countries plus Britain and the States.

Using that methodology, Deutsche Bank finds that UK CDS is 57 basis points too low, while US CDS is 90bps too low relative to the pricing action in the eurozone countries. Why the discrepancy?

Here’s what they think:

The relatively expensive level of European CDS relative to the US and the UK can be interpreted as the cost of fiscal and political dis-union. The sum of the individual credit risk of the EU sovereigns is greater than the credit risk of the Eurozone as a whole. Extrapolating from the UK and US CDS, one can infer that the cost of fiscal dis-union in Euroland to be around 55bp.

And here’s the chart:

For the alarmists and scramongers...

 

[nazzdack]

Quote from ASusilovic:
-----The analysts on Deutsche Bank’s fixed income team have done some number-crunching/modeling and come up with some interesting perspectives.......
-----the US and UK.

From now on, Germany will be known as the United German Republic, the "UGR".

 

[KINGOFSHORTS]

Why did Germany Want to Jump into the Euro and not stay independent like the UK. Now they have to bail out the losers.

I never saw what gains Germany got for this.

 

[dumb_mother]

Quote from KINGOFSHORTS:

Why did Germany Want to Jump into the Euro and not stay independent like the UK. Now they have to bail out the losers.

I never saw what gains Germany got for this.

eliminate the constantly biting edge from the currency exchange market makers of import / exporting on an export driven nation.

 

[christianhgross]

Quote from KINGOFSHORTS:

Why did Germany Want to Jump into the Euro and not stay independent like the UK. Now they have to bail out the losers.

I never saw what gains Germany got for this.

When I watch CNBC listening to the AMERICAN commentators, and read comments like this I completely understand why the US is being mispriced too low.

If you look closer at the EU it is about economics not money pushers! And the economics favors what Germany is doing. Germany is one of the biggest "exporters" within the EU, and they get paid in Euros. Thus when a Greek buys something German with Euro's the Germans get paid. They are not left holding funny money.

Additionally Greece has business ties to many places in Eastern Europe and Turkey. Europe sees this, but American's don't.

In fact I am laughing my head off on how dumb the American market is with respect to Euro land. For every drop in the Euro, the Euro zone can export more and more and more... Right now the Euro is priced in the sweet spot for most Eurozone countries. If you don't believe me go back in google news and search Sarkozy.

I talked about this to a trader in Fixed income and he told me that this was completely overblown and ineffective. I asked how come? He said people don't trade Eurozone instruments because they are managed by the ECB. When Germany needs to issue debt it does not need to go to the market. Likewise with most other EU countries. What is different now is that the ECB is starting to wag a finger at Greece and the other countries telling them to focus on saving money. As a counter action Greek went to the market and is seeing that the market is a rough place to be.

With respect to the US my trader friend said people flock to Treasuries because they know American needs debt. Thus there is always a market in Treasuries.

So keep selling the Euro and watch how American corporations become ineffective due to a high dollar, jobs continue to disappear, and Europe continues to grow...

I truly am laughing my head off...