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Sovereign Debt Induced Volatility Akin to Subprime: Chart Day

“Fear of the unknown” fallout from Europe’s sovereign-debt crisis, similar to the concern at the start of the subprime-mortgage market collapse, is keeping volatility high in financial markets, according to Jim Bianco.

The top panel of the CHART OF THE DAY shows the Chicago Board Options Exchange Volatility Index, or VIX, which began a rebounded from an over-two-year low in April amid investor concern that Greece’s debt crisis would spread across the region. In the bottom panel is a graph of interest-rate volatility, as measured by the Barclays Plc Swaption Volatility Index. Swaptions are options on interest-rate swaps.

“The fear is that the European banks are on the hook for big losses should there have to be a restructuring of European debt,” Bianco, president of Bianco Research LLC, said during a radio interview yesterday with Tom Keene on “Bloomberg Surveillance.” “This is akin to the early part of the subprime problem when we were basically asking, ‘What is a subprime loan?’ ‘Who has subprime loans?’ and ‘Who is exposed?’ It is again the fear of the unknown that is going to keep the volatility in the markets high.”

Last month the European Union crafted a $1 trillion aid package to support the region’s most indebted nations and the European Central Bank began buying bonds of member states.

European banks had $254 billion of loans to the governments of Greece, Ireland, Portugal and Spain at the end of 2009, according to figures from the Bank for International Settlements. That’s only 16 percent of the banks’ overall exposure to the four countries of $1.58 trillion, which includes loans to individuals and companies, the BIS estimates.

Volatility increased in 2007 as shares of financial companies slid as the subprime mortgage market faltered. Bear Stearns Cos., which JPMorgan Chase & Co. bought in March 2008, said in June 2007 that one of its hedge funds plunged because of subprime mortgage investments. French bank BNP Paribas SA halted withdrawals from three funds holding U.S. subprime assets two months later because it was couldn’t fairly value holdings.

(To save a copy of the chart, click here.)

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