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PIIGS update

Greece continues to be the focal point of the world, with the other PIIGS not too far behind—since they are the other dominoes that could presumably fall if Greece defaults. Greek Credit Default Swaps are now trading around 6500 bps, which is about where they have been for almost two months now. In contrast, and to help put things in perspective, I offer this chart of CDS for the other PIIGS, all of which carry default risk that is orders of magnitude smaller than Greece. Italy and Spain are still trading near the low end of the range of what is termed "high-yield"—companies that have some risk of default, but are still very much ongoing businesses that more often than not succeed. Irish CDS are priced only slightly above the average CDS rate of high-yield companies, and there are a number of viable companies whose CDS trade around Portugal's levels. Markets have had over 18 months to digest the risks of a Eurozone sovereign default, and this chart tells me that the individual risks of defaults outside of Greece are not earth-shattering. If they all were to default that would be potentially catastrophic, but the chances of that are small. Yet the market (e.g., PE ratios of equities and the 10-yr Treasury yield) is priced to something close to Armageddon. Given market pricing, I think that the odds still favor being optimistic.

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