Risk of PIIGS Default Continues to Rise

July 11, 2011 12:13 pm

This morning, further concerns out of Europe were introduced as the New York Times and Wall Street Journal have been discussing how European Officials may be holding an emergency meeting to contemplate the probability of Italy becoming the next victim of the debt crisis.  The Financial Times this morning also released a piece of how hedge funds are beginning to place large bets against Italian Debt.  However, instead of placing bets using Credit Default Swaps (the typical instrument to hedge against a default) Hedge Funds have been shorting the bonds outright.

This atypical situation is creating a concern for hedge funds to use Credit Default Swaps as it turns out, countries are doing whatever they can to keep European Sovereign Debt from defaulting.  This is a major reason why we may not be seeing the CDS spreads of Italy moving above their all time highs (See Chart Above).  Unfortunately for the sovereign nations, this may create a problem where their debt will have to yield higher interest rates then normal as the amount of supply increases and hedge funds leverage up short positions.

Markets this morning have been reacting rather negatively to this situation.  However, with Alcoa (AA) releasing earnings this afternoon, will Corporate America once again come in to save the day?

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