46 thoughts on “Priced In

    • It is very possible that the majority of Canadian government bonds are owned by the Central Bank of Canada or a few big institutional creditors. If there are not many bonds being traded in circulation then the market for people looking for insurance on them is probably quite small. Since a Credit Default Swap is a type of insurance on debt it is probably difficult to find a published value on what Canadian CDS’s are trading at since the insurance market is so tiny. Like it’s just a few people writing each other CDS contracts instead of a large liquid market with a reported price

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  1. The image speaks for itself, especially if you know how credit default risk is computed. But I don’t. Is it just a bunch of fellas sitting around asking “What do YOU think the risk is?”

    Liked by 1 person

  2. Chile riskier than Spain? India worse than Portugal? What a ‘peculiar’ grasp of reality Bank of America has. Fitch, Moody’s and S&P would disagree, though.


    • Well, these guys are putting their money where their mouth is. Anyone with a different opinion would be able to make lots of money (as long as he’s right)


    • That is not the opinion of Bank of America.
      It is the price that investors pay to insure themselves from default.

      In other words it is the betting odds on default.


    • Both Chile and India are standalone economies compared to the other two, as members of the EU. Neither Spain nor Portugal have great economies, but they have the Germans to help them. Every country has different risk factors, some weighted more than others. However, a common overarching economy/economic union makes for a nice shield against some issues.

      In early July, I took a naked position in Greek bonds. One of my partners thought I was insane given m normal conservative nature and figuring yon Hellenes would pull out of the EU, or at the very least, restructure. It turned out pretty nicely since I was betting on the EU and the “tempest in a tea cup” Greeks make out of anything involving debt (doesn’t matter whether its personal, corporate, or sovereign – they scream bloody murder anytime someone wants to collect). I didn’t hedge because I the CDSs were overpriced. That turned out relatively nicely so far.

      Venezuela, is radically different from the Greek situation. About the only commonality is that they rant and rave; Greeks about the (somewhat unfair) strictures forced on them (and which they agreed upon) and Venezuela about capitalism. I don’t recall, however, Venezuela ever screaming bloody murder about the banks. When that polemic shifts, it is time to think about dumping the Vennys,


  3. These graphs reflect only the amount of additional money creditors are willing to pay to insure their loans to different countries against the risk of their potential default , they gauge perceptions which we suppose anchored on some kind of methodical analysis and which, however thorough, may be falllible. Still this is real people wagering their money on an assesment so we can be sure that whatever risk analysis they use it wont be flippant or slovenly . People have a healthy fear of losing THEIR money and will go a long way towards avoiding such loss.

    In the case of Venezuela the assesment shouldnt be that difficult because basically all its revenues are tied to the export of oil so if you know its production figures for diferent types of crude , the cost of producing and selling that oil , the prices which are forecast to apply for the future sale of that oil, the imports that it must make to maintain the country protected from a breakdown in its internal operation, its internal consumption and the total number of money owed other creditors with their maturities you can asses what range of risks you are facing in different years.

    One thing we know is that the regime is strongly committed to avoiding default, whatever the sacrifices to the welfare of the country’s population . the fact that there are large oil reserves means little in the short to mid term . One important factor is the fact that the revenue per bl is falling because light and medium crude productionis is falling and being replaced by extra heavy crude which requires quite a bit of expenses to make it into a saleable product . for example its been recently reported that Venezuelan is importing 80kbd or 2.4 mb per month in naphta and diluents to mix with its extra heavy crude production to make it saleable to the international markets , this is quite a bit of money .!!

    Still theyve managed to stop the fall in the production which is important and are making important moves to maintain Pdvsa production and refinery output , lower its domestic market consumption and pehaps increase production a bit. oil prices are bound to climb at some point in the future which is also relevant . If the risk is overstated in no event is it insignificant .!! specially for 2016 and 2017.


  4. For heaven’s sake: read the central message rather than discussing other components of the graph. Venezuela’s default risk is, by a long shot, bigger than any other country. That’s about all I need to know.


      • Free gas! Anyone here want some free gasoline? Just step right over here young man. This is no flim flam carnival act. We’re PDVSA! We’re BIG! Didja see our Formula 1 driver? No sireee, Bob. Get your free gas right here!


  5. This is the kind of technical, convoluted topic that your average bloggers would hope CCSChronicles’ brilliant team of Professional Economists, Financial Gurus and ruthless Statisticians would help to clarify.

    But no, it’s Saturday and they must be jugando su Dominocito o shopiando en en Mall.

    That’s the problem with too much refinement and such advanced technical degrees: such brains tend to lose contact with us, the average exiled trabajadores criollos, when we need a simple peek on those intricate Macroeconomic Secrets. Instead they waste time begging the Burdel Supremo de Injusticia ( BSI, former TSJ) for a nostalgic taste of manipulated data.

    As a simple Arts major, all I basically learned in College were 3 aspects of critical thinking:

    1/ Contemplate, describe and analyse the nature of any problem
    2/ Ponder what-if scenarios
    3/ Answer the ensuing So What ?

    Hopefully, such ideas are presented with some clear, concise structure:

    A/ Introduction, B/ Thesis-Antithesis, C/ Synthesis-Conclusion.

    But this is just a blog, so case in point :

    1/ Kleptozuela’s controversial Int’l Debt Default. (Dejen la flojera, acuesten esa cochina, y expliquen brevemente lo basico, coño: Que, cuando, como y donde y porque?)

    2/ Default “cerrao”, parcial, con o sin anestesia, (Con o sin Bluff, para quienes prefieren el Poker). Renegociaciones, pataleos y lloraderas Griegas o no?

    3/ So what???? —– o en buen criollo, “Que es una raya mas pal’ tigre” ?!!


    • @Tony,
      Nice comment! Spot on. Please read my comment for some light into the matter; if its too technical, tough, let me know to tone it down a bit.



  6. Great graph, FT.

    Just a bit of info on CDS, which are relatively new and unknown derivatives but steadily rising as an asset class worldwide.

    Generally, CDS work as such:
    Buyer of protection goes to the Street and asks for an offer; the dealer quotes a CDS spread. If the buyer agrees and buys the cds, he has to do some premium payments on the following simplified formula:

    Upfront premium (a % of face value) + 100bps or 1% (investment grade) / 500bps or 5% (high yield) quarterly payment until the maturity of the CDS.

    The upfront premium (or cash back) is roughly given by the CDS spread minus the standardized coupon rate. The market value of a CDS contract is then given by the changes in credit spread: more spread means more cash payments upfront, and vice versa. That’s why there’s a dedicated trading community in CDS as well, as one can express ‘long’ views on a credit (selling a CDS) or short (buying it),getting exposure to the evolution of the credit without having to face a credit event.

    In case the reference credit does experience an “event”, the CDS seller has to pay back full face value in exchange for the resulted bonds. This has been also standardized to become a unique cash flow: CDS seller pays face value minus ” Recovery” rate. The recovery rate will be determined on an auction sanctioned by ISDA (the international swaps and derivatives association), with lots of fine print and minutiae that I really don’t know in full. In standard CDS pricing, the baseline recovery rate is 40% (Investment grade credit) or 25% (High Yield Credit); the actual recovery rates are determined on a case by case basis.

    VENZ CDS, in the same vein as the cash bonds, trade in a different manner than “regular” credits:
    Since the CDS spreads are so damn high, dealers quote the upfront premium paid by CDS buyers (in addition to the 500bps quarterly coupon) instead of the spread mentioned in the chart; the spread is then reverse-engineered using the same formula for ‘standard’ CDS, so its more of a construct to adapt the sky-high cost of Venny insurance to compare it with the other names.

    To give some context, VENZ 5yr CDS closed this Friday at 67.5 bid / 68 offer as quoted by a Street dealer. Which means that a protection buyer has to pay 68% of face value upfront to insure Vennies for 5 years (plus the 500bp quarterly coupon). The implied default probability at these prices, as you might guess, is around 99%; talk about “Priced in”, lol.

    On the other hand, if you happen to have some spare cash and guts of steel, you can get exposure to VENZ and other credits, and invest in a Credit-Linked Note (CLN), which works in practice as selling a CDS (but funded): you pay XX million USD and you will get a coupon of 3M Libor + the Bid CDS spread. If the issuer doesn’t default, you get full XX invested at maturity; if not, you’ll get recovery (some CDS are also made with Zero Recovery and higher coupons, for those who don’t really know boundaries).

    Hope this info helps, Best Regards!


  7. The above graph may represent good news for the regime to the extent that IF they can get enough money to buy Ven bonds using other names on the cheap , they will make the burden of paying these bonds when they mature much lighter.

    I understand ( this was mentioned in a recent blog) that the govt is on a clandestine shopping spree using every cent that it can spare to buy the maturing bonds with heavy discounts . Apparently they have bought 40% of the Bonds maturing in 2015 and will go on buying bonds maturing on 2016 and 2017 , so the cheaper the bonds the bigger the advantage gained if they buy them using intemediate brokers.

    Lets remember that the really big bond payments are due in 2015 (6.3 billion $ ) and then arround 10.5 bllion $ in each 2016 and 2017 , then they are off the hook. So to the extent the risk default assesment on these bonds makes them specially risky there is greater chance of their buying them very cheaply and avoiding default . This was done in the past by the govt of Bolivia with very good results .

    Some (who have in the past shown themselves partial to the regime ) have estimated that if default happens the recovery factor will be arround 30% (a low number which makes selling them to regime proxies more attractive) ,

    The subject was discussed by a group of Venezuelan creditors meeting in the offices of a Wall Street Legal Firm some months ago . Their estimate was that the hair cut the creditors would have to suffer if Venezuela defaulted would not be as high as in other cases because they figured that as Venezuela was sitting in a mountain of oil it could be pressured into paying a bigger than normal portion on their defaulted debt. This of course is BS inasmuch as that mountain of oil is made up mostly of extra heavy crude which is difficutl and costly to produce and convert into a saleable crude which lessens the revenue to be obtained from its exploitation .

    This is a topic that may deserve further discussion in this blog !!


    • I think the 30% may be optimistic.

      I grant you, they have shown an almost obscene willingness to pay their obligations, but with access to oil income post-default, I believe they will pull an Argentine Debt-Tango and give the bond holders the figurative finger. If they are cut off from the credit markets, they will no longer be able to pass a nickel of the oil income to bond payments.

      Of course, none of this will happen until they are done monetizing their assets outside of the country. I give them credit, they’ve done a great job in the last 1.5 years magicking up funds from various sources; primarily the Petrocaribe debt and the refinery sales, amongst others.


      • Pitiyanqui you may be right but perceptions dont always reflect reality , the creditors in the meeting at the wall street firm were confident that in the event of default they would be able to reduce the size of their haircut vs other comparable defaults because Venezuela was sitting on a mountain of crude forgetting what kind of crude it was , Maybe the 30% figure is optimistic but the outcome of any negotiation process is really unpredictable .!!

        About the possibility of their pulling an Argentine Debt Tango recently Moises Naim (to me a very respectable voice) referred to the possibility that they might renege on their debt towards the end of the year arguing that the unpaid money would go ‘to the people’.

        On their ability to monetize outside assets , I am less impressed than you are , they have monetized the reserve gold which might turn back and bite them in a few years time , they have monetized part of the money owed by the petrorcaribe allies but at the behest of the countries themselves who saw an oppotunity to improve their foreign debt situation on the cheap , use the process to get some money for themselves and sattisfy the demands of interntional financial institutions to improve their external accounts. I dont know what refineries they have sold except refineries which were already shut down (Hovensa, which Im not sure was ultimately sold) and the one they shared with Exxon which they sold at a pittance. Their efforts at selling Citgo failed miserably because of the very low offers received and the much smarter move by the president of Citgo to use the companies revenue stream to get a loan which funds could be transferred to Ccs.

        In the end the default will likely ocurr and the govt and the creditors will seat down to negotiate an extension to the payment term on the money owed , the creditors will suffer their haircut big or small and the process will be long , dificult and quite possibly involve very traumatic effects for Venezuelas population .


        • I think we are just looking at different sides of the same coin and, the uncertainty is what feeds the CDS spreads.

          The stories we hear about the monetizing of assets is just another way of the government carrying on another day….but still seems to me as borderline fire sale. I expect that behavior to continue, if not accelerate in coming months, particularly given coming elections (if they are even held). The government’s intransigence in adopting “rational” policies, makes me think less and less of a leadership clique looking for sustainability and more and more of a plague of locusts.

          As far as the traders, methinks that their point at the same time undermines their argument. Countries in default and that are import dependent, need access to markets for external trade/sourcing funds. Venezuela has a nice source of revenue and a proxy in China, to allow the cash to continue flowing in to the country, but they may not see the need to flow it out again. That’s why I’m so leery on the recovery value and why I believe that, if the government skips one payment, they’ll skip all. Not so much a slippery slope as a sheer cliff. (Just my opinion, mind you; I could easily be wrong, which is the reason counterparties exist in the marketplace.)

          They can’t keep the plates spinning forever, and I think the chart above reflects the general consensus on this. The question is less of an if and more of a when.


          • I also feel that default is highly likely in 2016, quite simply because the money tsnt there , and that they will try and dress it up as a revolutionary decision of defiance against the western capitalist world . the hair cut will be deep (more than many creditors expect) because they totally misjudge the oil reserve situation , reserves arent worth that much until they become commercially exploitable , before that they are worth very little , once witnessed the calculation being done. The chinese will try hard to maintain their supply privileges but once the boat goes under they wont throw good money after the bad. In any event all defaults end up in a negotiation, which objects are , the extra money needed to straighten things enough so that money starts to flow again, the size of the haircut and the terms of future deferred payments drrawn out over a longer period of time , Its going to be nasty and people in venezuela will know harships like theyve never known before.


  8. A CDS on US government debt? Think about it long and hard, the day the Government of the United States default, the wise ass that you bought this insurance product from (the CDS) will pay and deliver to you. As other people have pointed out, these prices are part market driven part idiosynchratic, not all CDS have the same levle of liquidity, I agree that the big picture is that Venezuela is riskier than most other countries, but you don’t need this CDS chart to know that, other factual elements would be total reported debt to adjusted GDP, some element to account for unreported debt, political instability, etc. The Russian CDS level for example has to be mostly politically driven (total debt to GDP below 20% – so it seems to reflect potential doubts on willingness to pay rather than ability to pay). What is interesting is that the CDS market seems to place more weight on the former (willingness trumps ability). Perhaps the real message here is that the willingness to keep paying up coupons and principal of the Maduro regime, maybe gettng weaker and weaker by the day.

    And for those arguing that these are real people wagering real money, I beg you: think for a second the exposure of some people selling you insurance they THINK they may never have to pay up on – and then think what the ability of them to deliver is, again I go back to my original point: a US domiciled bank sells you a CDS, a catastrophic event that leads to a US default occurs on that day you go to that US bank and demand payment?

    Asides from liquidity it would be interesting to know the NOTIONAL ammount of CDS that backs up these figures, a number in finance is more relevant i.e. closer to market value the more liquidity/notional there is behind that number. This chart compares apples with oranges. You are not looking here at the stock prices of the DJIA in a chart, you are looking at thinly traded, low notional CDS, vs well traded CDS with high levels of open interest.


  9. This is way to complicated for anyone like me who despises int’l finance.

    All I’d like to know is the SO WHAT part.

    If the Kleptozuelan thugs do the “Argentine Debt-Tango” or simply don’t repay the debts what are the plausible repercussions? A freaking trade embargo from the Chinese? Didn’t think so.


  10. One point which might be worth exploring as tony mentions is the situation of the Chinese debt , most of it is not catalogued as a debt because of accounting gimmicks. Moreover almost every single cent is paid through elaborate supply arrangement which if fact work as a pledge or mortgage on future supplies . That might contribute to mess uglily up any post default negotiations with other creditors .

    What worries me is that Venezuela is already in a dire and difficult situation , basically living from hand to mouth depending almost totally on imported stapples , if you throw in the wrench of a self declared default or any kind of default the living situation of ordinary Venezuelans is going to turn much more intolerablethan it already is . Whats going to happen then besides the creditors taking their measures to seize and impound the revenue form Veneuelan exports and any asset belonging to the defaulting debtors .?? can anybody visualize what that will mean. ??


  11. Since the CC economists are so lazy and bloggers so complicated, I had to find my own “What if” and “So What” simple answers, here :



    Then you can form various opinions: my guess is they will weasel around the issue as long as possible, to continue Stealing as much as possible, then continue to blame the Ultra-Derecha and the Yankees for the debt and stealing everything ( the “ah, yo no fui, son los pelucones” routine, which passes because our pueblo is so incredibly ignorant) and continue mortgaging the oil and whatever else they can even more. Whoever is in power after the next 2 fraudulent elections will then have to face the music, do the Greco-Argentinian-IMF Default Dance, (GAIDD), and give away the very last oil bushels left until 2070, and refinance some more.

    Ayyyyy Papa.. More info during the 2020’s @ http://www.Chavista-light.Mudcrap.gov.
    Kleptozuela is so screwed for decades to come.


  12. Could someone explain why China is more ‘at risk’ than the US considering it is its number one creditor?


    • Officially most money owed to China is not classified as a debt , Money owed China is for the most part securitized thru the mortgaging of future oil supplies , Not sure they are worse off than other creditors !!


      • Unfortunately my economics’ jargon isn’t as polished as I would like. In layman’s terms; if person A loans person B $100, why is person A more at risk?


        • There is a slight, but common, error about gringolandia’s debt. China, in recent years, has been the of debt. They passed Japan back in 2008-2009, if memory serves. However, earlier this year, when both economies were dumping US bonds, China sold more, putting Japan back on top again. They both sit on about US$ 1.22 trillion.

          Now, that sounds like a lot, however, each only holds about 7% of outstanding US debt. The largest credit of the US is….the US. About 2/3rds of US debt is held domestically, with about 25% held of the total by private institutions (pensions and others) and the remaining 45% held by the government itself (including about 11% at the Federal Reserve, which is, as a single entity, the largest creditor).

          As far as China goes…. the big stories coming out of China in the last few years have been their “stunning” economic success. However, it has come at a heavy toll, most of which is now covered in environmental and safety issues, such as the explosion at Tianjin in recent days, or the air quality of Beijing/Shanghai/etc. One of the things that goes mostly under the radar of the press, but is well known amongst the players in the markets is that there is an entire shadow-banking economy that runs in China and of which there is zero transparency. Estimates of the “real” debt of China, and how much things are propped up by the central government there, are pretty spectacular and, rather than give China the impression of a new and booming superpower, makes it look much more like a house of cards. Witness, if you will, the recent shakiness in their exports, which is still the primary engine of their economy, and the unprecedented acts of the PBOC in allowing the RMB to finally be affected somewhat by market forces (even if only for a couple of days).

          Now, you might ask why China is even bothering with debt given the huge trade imbalances and more or less one-way cash flows. Much of Chinese debt is local government, and they are heavily leveraged. For most countries, local debt is an internal issue, however the central government has largely backed the rampant debt issuance, in both financial and policy senses. As the economy there slows down (lowest growth estimates in years, exports dropping like a stone, the Hang Seng off about 15% from its May highs, etc.), and the government is pushed to adopt new tactics to stimulate it further, there is an increased systemic risk to the whole thing…and while China is certainly more proactive than Venezuela, there is an ongoing “business-as-usual” mentality among the debt issuers at the same time. While there’s some things I don’t agree with, http://www.zerohedge.com/news/2015-08-15/chinas-debt-load-hit-250-gdp-5-years-imf-says covers this nuts and bolts of the local debt issue.


        • Pedro,

          Look at like this: If you owe me $100 and you can’t pay me, you have a problem. If you owe me $1,000,000 dollars and you can’t pay me, I have a problem.


    • Because the US are indebted in their local currency (USD), and the Fed has the money-printing machine. Simple as that :)


    • Excellent news!!

      At least Cubazuela’s disastrous debacle is helping other countries like Brazil and Spain. Showing them exactly what not to do. Fortunately for all in Latin America, our big brother Brazil is not totally corrupted, there is some separation of powers, they say the military is not entirely bribed, as in Guisozuela. Plus Brazilian people apparently are not as corrupt, lazy, ignorant and/or stupid as millions of Venezuelans must be, considering how differently each populace is behaving.

      “But police estimated the number of participants at one million, based on aerial photographs of the area.”

      Awesome.. Last call to street protests by the MudCrap in Vzla was a total failure, and the majority of the lobotomized, zombie populace still adores Chavez, 25% = 1 Quarter is still Pro-Masburro !!

      Guess they need a few more years of “Patria” and Imperialist imaginary wars, while they refresh their corrupt populist ideas, begging in line for more harina pain “a presio justo”.

      In many ways, Cubazuela got Brazil into its current predicament: Chavez bought Luladron and his Petrobras gang, (along with half of Latin America); and thanks to Chavez’s well-documented Smartmatic late-evening Fraud, Dilmabitch stole the last extremely close elections, just as Capriles got robbed: final Fraudmatic adjustments, courtesy of El Comandante Supremo my country aborted. So it’s good to see that Vzla’s catastrophic example is helping now.

      Great to hear Brazilian people have woken up, heck even in Ecuador you see these great signs of hope!! It’s obviously an extremely important nation to turn against Chavismo, Chile will soon follow knocking of that Allendista Michelle whore, and the other Argentinian chavista bitch will hopefully go down next.

      Go Brazil !!!


      • I was in the protest today in Rio, and one thing we chanted several times was: “Lula leva ela pra Venezuela”, “Lula take her (Dilma) to Venezuela”. Several similar chants followed. People are fascinated about Venezuela. Hell, the fact that I am writing this in this blog is a sign of that. It something too horrible happening just too close, a similar people, a similar language. If Venezuela were in Africa, I doubt that people would care that much. No one cares about any other country in the world in the protests, though, not one word about Cuba, or Argentina, or Ecuador nor Bolivia. Venezuela was the country remembered every 10/20 minutes.

        “Awesome.. Last call to street protests by the MudCrap in Vzla was a total failure, and the majority of the lobotomized, zombie populace still adores Chavez, 25% = 1 Quarter is still Pro-Masburro !!”

        And that one million would be in only one city, mind you… About Venezuela’s figures, it’s kind of normal in a country where the police is controlled by the dictatorship that people will feel unsafe to go. Here in Brazil the state polices are still independent from the federal government. The Army doesn’t bother with this kind of thing, either. So it’s safe to go. We must be honest and recognize that the scenarios are different in the two countries. Another good thing about the Brazilian protests is that you could see many “pueblo” with us. At a certain point my wife showed me a construction worker walking near us, with the uniform still dirty of cement, holding a banner against Dilma… That’s the people who used to vote for Dilma and Lula.

        I mention that because the Workers’ Party likes to say that there are only white and wealthy people in these protests, but if you go to any of these protests, or even see videos, or pictures, you will see that this is a complete lie, you will see people from all races, education levels and social classes. It shows in these protests that Dilma’s approval rate is really below 7%.

        Thus, some black people, anger about the Workers’ Party saying that they don’t take part in these protests, are taking funny pictures like this one below and posting on social networks.

        “White elite against Dilma”

        And, yeah, what’s happening in Ecuador is good to see too. Bolivarianism is dying everywhere. But rest assured that they will go kicking and screaming.


        • Great !! It’s very important for all of Latin America, indeed the world, that Brazil fights off Chavismo and Populism, and gets on the right track. One day, even Cubazuela will follow!!

          It’s also important that they bring those Oderbrech and Petrobras Thieves to Justice, and also Luladron and Dilmabitch.

          It would set a very important Legal Precedent for the entire region.

          Vamos Brazil !!


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