Unsinkable OR practically unsinkable

"We do not care anything for the heaviest storms in these big ships. It is fog that we fear. The big icebergs that drift into warmer water melt much more rapidly under water than on the surface, and sometimes a sharp, low reef extending two or three hundred feet beneath the sea is formed. If a vessel should run on one of these reefs half her bottom might be torn away." -Captain Smith, Commander of Titanic

23 June 2010 the Italian CDS widened to 198! Europe is in an icy fog. Could an AIG or too big to fail be out there under the surface with icy ragged edges about to sink the unsinkable or practically unsinkable Euro? No one seems to be sure because once again of derivatives and some companies having likely insured billions of dollars of European debt. The first strike will be Greece defaulting, second Italy, then the third Spain. Alarms will go off and MayDays out but no one will be able to maneuver in time to prevent another wave of TOO BIG TO FAIL.

The lookout in the bird’s nest, First Mate Ben S Bernanke reported to the pilot deck, “a disorderly default in one of the those countries would no doubt roil financial markets globally. It would have a big impact on credit spreads, on stock prices, and so on.”

So what are we really talking about? No one can actually put a firm number to the actually size but the floor is Italy, Spain, Greece, Portugal and Ireland’s sovereign debt which amount to $616 billion. So not being to outrageous but you could easily have a $6-7 trillion exposure or more! “There’s not any clarity here because people don’t know,” said Christopher Whalen, editor of The Institutional Risk Analyst.

Much like housing bubbles, CDS bubbles where they are known or believed to be must be popped before they get to catastrophic sizes. An orderly Greek default would likely be in the best interest of the market, provided it doesn’t set off a domino effect and that would not be known until we set it in motion.

European banks hold the bulk of direct (cash) exposure to peripheral European borrowers, whereas US banks have little direct exposure. But US banks appear to have written the majority of CDS contracts on peripheral European borrowers, up to three quarters of the total in most cases. The data doesn't tell us who has bought CDS protection on peripheral European borrowers, but it would be reasonable to assume that EU banks have tried to hedge their direct exposures by buying CDS protection from US banks. Therefore if we get to the point where a European borrower restructures its debt you would assume that Europe in general would have an incentive to try and trigger CDS protection payouts, whereas the US would typically want to avoid an event of restructuring because its banks would then potentially have to make big payouts. Guess what? First Mate Ben is working this hard with his European Counterparts.

"And it wasn't until we were in the lifeboat and rowing away, it wasn't until then I realized that ship's going to sink. It hits me there."
-Eva Hart, Titanic Survivor

Investment ideas, shorts on US and EU banks (see CMA spread trends for ideas)