IS THE CDS MARKET SENDING A WARNING SHOT AGAIN?

As the problem of debt refuses to go away and in fact, quietly spreads, we’ve seen another slow development over the course of the last few weeks – problems in Greece appear to be worse than originally expected and credit default swaps are sending warning messages again. The term structure in Greek CDS recently inverted as investors are now increasingly concerned of a default in the next few months. This is something we saw in 2008 before the financial markets nearly collapsed. That time the inversion was in Lehman Brothers and Merrill Lynch CDS.

As the problems in the banking sector unfolded in late Summer 2008 the sovereign debt of the big three developed nations began to skyrocket before reaching a crescendo in early 2009. What’s alarming with the situation in Greece is the similarities in CDS price action. The recent uptick could be serving as a warning flag of things to come in 201o and 2011 when the problem of debt has potential to rear its ugly head again. Barclays might not have been too far off when they said the probability of a crisis would grow in 2010.