Don't Drink The Water: The Great CDS Colonial Reversal

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The following post is by a hedge fund manager friend of DB who shall remain nameless. He runs the emerging markets desk at his firm.
It's the financial version of Montezuma's revenge! The meltdown in Western European sovereign credit has led to a Great Colonial Spread Reversal. Until now, only select Anglosphere colonies had posted tighter spreads than the old metropolis. Sovereign spreads embodied the tradition order when it came to Latin America. When Latam hit turbulence, investors looked at European bank and corporate exposures to the old colonies, or figured on expensive support packages and pushed the colonizers a tad wider. But the shades of some conquistadors this week are weeping in Hades, for their world has been turned upside down. Cortez and Cabral, call your office! Pizarro, take a peek at your portfolio! Mexico and Peru now trade tight to Spain. Brazil is sitting well inside Portugal. For the moment, the sacred memory of the Raj is safe - State Bank of India still trades 50bps wide to UKT - but Gandhi's ghost may be rubbing his hands with anticipation while Clive sweats, as the spread is narrowing. France maintains a safe lead over francophone Africa as does Belgium with respect to Democratic Republic of Congo - for now!


Your correspondent is a mere bond monkey and would never presume to fathom the involutions of the theory-mongers of academia, yet it seems to him that some post-colonialist criticism might be due for a rewrite. The centuries of metropolitan plunder of the colonies left them with weak institutions and impaired human capital. As a result, the colonies never built robust welfare states with ironclad entitlements, nor mighty, leveraged banking systems. They were never advanced enough as credits to achieve the characteristics that in today's crisis mark out... bad credits

Tupac Amaru takes his revenge.

Montezuma's revenge: Spain loses its shit. Two hundred years after Hidalgo, the grito is one of pain, and it's coming from the Spanish this time.

To be fair, this shouldn't be an entirely new feeling for Portugal, which experienced a real (and not merely financial) "metropolitan reversal" in the early 19th century. From 1808 to 1821, the seat of the Portuguese royal court was Rio de Janeiro.

Curzon is still a superior person, but India is closing fast.

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