Credit risk increases on Greek default chat

We are seeing a big drop in the TED spread, reminiscent to what we saw in 2007 as the Euribor and Shatz are going in opposite directions. The fact that the Greeks are having trouble forming a government, it looks likely that the next tranche of the bailout may be withheld. This in term has led to the Euribors being sold off relative to the Shatz, as investors flock to German government debt and away from AAA rated Euribor. Also if history is anything to go by, if the threat becomes more credible, we could see interbank lending rates continue to increase, and we mite have banks reluctant to lend to each other again, and this in turn leads to another freeze in the financial markets. But that is still some way away, but its good to remain cautious and use the past as our guide for what could happen. Either way as far as trading is going, it s a tough day to be a mean reversion trader and the blow out in the TED could be the first of many, if this uncertainty continues.