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This is a first, and gives a great view of the real situation happening in Europe.

11:25 06Jan11 RTRS-Western Europe CDS index above emerging Europe for 1st time

It doesn’t take a genius to see that western Europe is about to experience some reality.  The latest comments about private investors taking haircuts on  bank debt has causes the CDS on Western Europe to explode today.  It is obvious to even the slowest of bond traders, that the ECB and the EU is setting up a shearing of bond holders.

The report is designed to allow the EU to takeover any sized bank, that is out of control.  This is State vs Bankers at the moment.  However, bond traders know that like sub prime, the problem is not going to stay in Bank debt.  They are now hitting the bids on their Sovereign holdings.  This is how you start a Bond Vigilante moment.

Sovereign debt issuers and Bank issuers are now in a war of attrition for rolling over their debt.  Watch as this turns ugly.

You can expect a surging of Euro based debt into the Market, just as China says it is stepping up its purchases in this sector.  Timing can be everything it seems.  If you were a Euro bank bond trader, you are praying the Chinese show up with a huge bid.

However, reality so far has been that spreads on Portuguese, Spanish, Belgian, Italian Sovereigns all fell out of bed compared to Bunds, when the report was released today.  This report is a white paper on future haircuts for investors.  The European system is denying on one hand there is a problem, and in the other hand is saying we have to have debt restructuring.  Which is a nice way of saying that the Euro states & their banks have to default on their debt. Banks first, but also States, need to restructure their debt loads.

This is building up to either Germany saying it will accept Euro Bonds issued by the ECB but backed by Germany, or the German Mark is about to rise again.

This is a game of chicken between the EU & Germany. While the Vigilantes ride…