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If you are wondering why European stock markets are down today, look no further than the chart below.  Greek credit default swaps are at their highest level ever.  And ever, as they say, is a long time.

As always, credit markets are leading indicators for equity markets.  The implication of this level in credit default swaps is that Greek debt is probably not worth the value that the European Central Bank is currently buying it at, which is at par.  The broader issue related to a Greek debt restructuring is the balance sheets of European banks that hold its debt.  As we noted on our Sovereign Debt Call in March . . .European debt is interconnected.  In fact, France, Germany, and Britain own the vast majority of Greek debt.

Aside from watching European CDS, we have also been very focused on European liquidity with a primary concern relating to the piling up of cash in the ECB deposit facility, a sign that banks are not lending.  As it relates to specific liquidity catalysts, July 1st should be a day of focus in Europe as that is the date the European Central Bank’s 12-month Long Term Refinancing Operation winds down.  Over the course of that 12-months, more than 440 billion euros of liquidity was added to credit markets.  Shortly, this will be in the rearview mirror, and with it the lows in the cost of capital in Europe.

Credit and liquidity issues in Europe are just beginning.

Daryl G. Jones

Managing Director

Hedgeye Break-In: Greek CDS At All Time Highs . . . Ignore At Your Peril - PIIIGS CDS