Right now, Markit’s iTraxx SovX Western Europe and Europe Senior Financials indices are trading lockstep with each other, according to Markit.
From Markit’s Otis Casey (emphasis ours):
Correlation between the indices since April 1st registers at 0.87. The basis between the two indices going inverted in July reflects that the markets not only believe that the destinies of sovereigns and banks are closely intertwined, but there is an implication for potential risk transfer to sovereigns (as lenders of last resort) if their financial systems become inadequately capitalised.
So there is now a Europe wide assumption that, no matter what happens to one of the continent’s banks, the sovereign state it belongs to will come to its aid.
Moral hazard, anyone?
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