Looking For “Euro Exit Risk?” We Found It In This Chart

Remember the whole France ISDA basis debate that started to heat up in early February?

No? That’s ok, it’s easy to summarize.

Basically, when it came to France sovereign CDS, the 2003 docs didn’t have a chance in hell of ever triggering while the 2014 contracts very well might have in the event Marine Le Pen won the presidency and pushed for redenomination.

So ultimately, it wasn’t clear why the 2014 contracts weren’t trading well wide of the 2003 contracts. In early February the spread was just 4bps. Even if you thought the 2003s had some value (they probably didn’t), the idea that they should trade basically inline with the 2014s was patently absurd. Ultimately that 4bps spread would blow out to 35bps.

Well, needless to say, that spread has collapsed now that Macron is President, but as Barclays writes, the next risk is Italy and that’s reflected in the 03-14 switch.

“Although a snap election cannot be ruled out, our economists believe that an Italian election is unlikely until 1Q 18 [and] although the outcome from an Italian election is uncertain, risk assets have taken little notice, except in sovereign CDS where the 03-14 switch (buying 2014 definition, selling 2003 definition) – a potentially highly convex trade on a euro exit – remains high for Italy, whereas it has retraced almost completely for France,” the bank observed on Friday.

Here’s the visual:


Something to keep in mind as the market remains “EU”phoric.


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