by Richard Barley
Wall Street Journal
May 11, 2011
If Europe is on the brink of a Lehman moment, there is little sign of it in the credit markets.
Speculation about a possible Greek debt restructuring has caused gyrations in the value of the euro and euro-zone government bonds. But the European credit markets, and in particular bank credit-default swaps and bond spreads, have remained resilient. That looks somewhat complacent.
One barometer of systemic stress is the Markit iTraxx Senior Financials index, which tracks the cost of insuring the debt of 25 major European banks and insurers. In June 2010 after the initial Greek bailout, this index showed it cost €205,000 ($294,200) to insure €10 million of debt; the cost hit €210,000 in January after the Irish rescue stoked fears of losses on senior bank debt. But it is now just €136,000.
This partially reflects confidence that senior bank debt is sacrosanct again. If Ireland couldn't impose losses on bank debt, say traders, no other country will succeed. Some investors may be betting there will be no near-term restructuring, voluntary or otherwise. Greek debt prices may overstate the risk, given that the market is illiquid; credit markets may paint a more accurate picture.
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