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Positions in Europe: Long Germany (EWG); Short Spain (EWP)

Below we show our weekly European Risk Monitor charts that indicate more of the same trend: default risk across the European peripheral—especially in Greece, Ireland, and Portugal—is elevated to levels that defy historical examples, including a breakout above the 300bps line in CDS that has expediently led to default.

As we’ve been noting in our research, despite the inability of the PIIGS to see material improvement in their fiscal imbalances via austerity measures, the EU along with the IMF continue to subsidize country shortcomings, which portends some combination of additional bailout packages, more favorable debt terms, and support in the common currency over the intermediate term. We stress that Eurocrats will ultimately Extend & Pretend to insure the union of unequal countries remains intact. This includes sugar coating words like restructuring and kicking the debt can further down the road.

Given, we see intermediate term TREND support for the EUR-USD around $1.40, with immediate term TRADE line resistance up at $1.46.

Headline risk remains a governing (and volatile) factor across Europe. Over the weekend we got confirmation that Greece will receive its next loan tranche from the IMF, which is contributing to the EUR-USD swift upward move today. Additionally, news from Portugal that the opposition Social Democrats defeated the ruling Socialists under PM Jose Socrates is positive for the region and currency on the margin.

Matthew Hedrick


European Risk Monitor: Headline Risk Prevails - cds1

European Risk Monitor: Headline Risk Prevails - yields 2

European Financials CDS Monitor – Bank swaps in Europe were mixed to wider last week.  20 of the 38 swaps were wider and 18 tightened:

European Risk Monitor: Headline Risk Prevails - t1

European Risk Monitor: Headline Risk Prevails - t2

European Risk Monitor: Headline Risk Prevails - t3