Euro and CDS spreads

Everyone already knows that CDS spreads are blowing out and going beyond parabolic on the eurozone countries. What is equally as surprising is that no one is talking (YET) about the CDS themselves. People are selling them at different prices along this move, which means someone is left very short. Selling insurance is a great business…until the disaster strikes, at which point the insurance company prays that they have enough carry to cover their costs. In the case of CDS securities, the combination of never-experienced volatility with high leverage is going to become an issue. I don’t know which institution will break first, but someone must be sitting on significant losses and with year-end approaching fast, I wouldn’t be surprised if we start hearing some bad news from the big CDS-issuing banks.

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