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PIIGS: Europe’s ‘Sub-Prime Borrowers’

May 5th, 2010 Michael McDonough

As the crisis in Europe continues to spiral out of control, I wanted to take a look at the cost of insuring against default for the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). As you can see from the chart below, over the past several weeks 5Y CDS for the PIIGS has risen substantially, with the biggest gains coming from the epicenter of the crisis—Greece.  Downgrades for both Portugal and Spain with the specter of more to come, have combined with deadly protests in Greece, widening spreads for  the PIIGS government bonds over Germany–the European benchmark rate–to record levels.  I expect volatility will continue as the situation escalates, with Portugal and Italy being most susceptible to increasingly worried investors, and ratings agencies still under significant scrutiny following the US subprime disaster.  Over the short-term, the result of a Spanish 5Y note auction  tomorrow should help measure investor sentiment;  a successful auction could help stymie, at least for the time being, fears of contagion.

5Y USD CDS for the PIIGS

Source: Bloomberg

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