New $170B Greek Bailout, 5 Year CDS Graphs

European countries reached an agreement a few hours ago to once again save Greece from defaulting with a new EUR130 billion ($170B) bailout. Of course it’s not hard cash but actually more loans given to a country which struggles to get out of recession during the last years. Giving loans to a discredited borrower hasn’t exactly been the best financial strategy, but obviously people with big chunks of money and unlimited wealth know better. Investors who have risked money betting on a Greek default are still waiting for the credit event that will allow them to get paid on their bets. The 50% bonds’ haircut that took place in 2011 wasn’t enough as it wasn’t regarded as a credit event and they are still holding Credit Default Swaps (CDS) in their hands. Meanwhile, strong uptrend can be found in both the Greek and Italian 5 Year CDS graphs. Let’s see how CDS will react after the Greek bailout, since the graphs are valid until 17th of February.

The 5 Year Greek CDS graph shows a couple of notable important levels, such as 3,000 and 5,000 basis points. Greek CDS exceeded 10,000bps during 2011; a fact that led me to do a little research and actually find out a Tyler Durden’s article describing the meaning of such an event. His conclusion in the short post he published in December 2011 was that spread in CDS terms becomes irrelevant. Anyhow, Greek CDS are now close to 9,000bps after an optimistic 7,000bps drop between December and January. Will they breakout above 12,000 or retreat lower to 5,000bps since the new bailout deal?


In the meantime, the Italian CDS graph shows a recent decline but I consider that a pullback actually. Since CDS broke above the resistance level at 250bps, we are surely talking about an uptrend, although it has lost speed as of lately. Maybe CDS retrace back to 250bps before resuming the uptrend. For the time being we’ll have to wait for reactions after the bailout. For instance, one would expect EUR/USD to retest the resistance level at 1.33 after recent events, but investors don’t seem to trust the short-term uptrend, as the currency pair has dropped from 1.48 to 1.26 in less than a year!