Jumat, 24 Agustus 2012

Eurozone improvements

Eurozone 2-yr swap spreads have plunged by 65 bps so far this year, and are now almost back to the levels that preceded last year's flare-up of Eurozone default worries. This tells us that the ECB has been successful in its attempts to inject needed liquidity to the financial system. The risk of major bank defaults has been sharply reduced, and that in turn brightens the outlook for the Eurozone economy. Problems still exist, of course, but the atmosphere of crisis and panic has all but disappeared. Liquid markets have an amazing ability to sort out problems, by allowing participants to distribute risk to those more willing and able to bear the risk. 

5-yr credit default swaps are an excellent indicator of the credit risk of major borrowers. As this chart shows, default risk has dropped considerably over the past year. Spain, Ireland, and Italy are now considered to be better credits than the average junk bond. They are still risky, of course, but at these levels the risks are manageable and attractive to many institutional investors hungry for yields.

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