Moody’s Raises Sovereign Contagion Alert

The cost of protecting European bank bonds from default surged to the highest level in 13 months as Moody’s Investors Service said lenders face “very real, common threats” from the region’s fiscal crisis.

Banking systems in Greece, Portugal, Italy, Spain, Ireland and the U.K. may come under pressure as the crisis worsens, Moody’s said in a report today, according to Bloomberg.

“The risk is for the banking sector because they’re the ones that own most of the government bonds and in cases of extreme crisis banks rely on governments to bail them out,” said Juan Esteban Valencia, a London-based credit strategist at Societe Generale SA. “If governments can’t issue at relatively normal levels, it’s going to be very difficult to bail out banks and that means banks are getting hammered

Huge Bets on Euro Core Zone Meltdown

There was a stunning $630 million, $558 million and $370 million in net notional derisking last week. Huge negative bets were made on France, UK and Germany, not just in sovereigns but in all names, reports ZH.

The greatest non-sovereign derisker in the last week? Goldman Sachs, with $175 million.

This is extreme panic, worse than September 2008, when the money market Reserve Fund broke the buck.

It is quite possible the PIIGS don't survive without default, but the UK isn't going that route. The UK is in a completely different situation. It controls its own money so it can print its own way out of their debt hole. This is very inflationary, but it is likely what they will do, rather than default.

Further,  there is also no reason to bet against private triple A German debt. The German economy will survive.

Crisis breeds opportunity. Stay alert.