This from Today’s Financial News:

The markets were forced to endure one round of default swap payouts last week. Now, the debt from three more companies will hit the auction blocks. Even more trouble is on the way.

On a micro level, yesterday’s 900-point rally looks like a big deal. Many short-sighted investors look at the day as an indication that the worst is behind us. But on a macro-level, the surge barely stands out. After all, yesterday’s bounce did not put us anywhere near the levels we started out at last week. We still have a long way to go and there are some pretty big hurdles to clear along the way.

One major challenge over the next few weeks is three more debt auctions. Yes, three more defaulted credit auctions.

The International Swaps and Derivatives Association has held just nine auctions since 2005. It will hold five of them in October alone. It is a sign of the times.

Last week, we saw Lehman Brother’s debt on the auction block. Selling for about nine cents on the dollar, the market had a tough time swallowing the nearly $400 billion that was suddenly needed to cover the debt’s default insurance.

Now, there are more costly auctions on the way. On October 23, Washington Mutual’s debt will be sold. Again, investors can expect the debt to sell at a drastic discount.

You can count on the equities market taking a shot on the chin that day as credit default swap (CDS) owners are forced to cash in their portfolios to write checks for tens of billions of dollars in insurance payouts.

Just as we saw a “run” on the markets last week, we will see it again as another multi-billion payout comes due.

Big problems overseas

In Iceland, the country that is arguably feeling the credit crunch the most, investors are already flinching at what could be deadly CDS payments.

When Landsbanki and Glitnir were taken over by the Icelandic government, its debt went into default. That means the folks stuck holding the default insurance will be forced to pay up. Even if the debt is auctioned at a fairly substantial rate, billions will be paid out.

Landsbanki CDS sellers are obviously hoping for a highly successful auction. If the debt sells for fifty cents on the dollar (which is highly unlikely), some of them may actually make money. After all, the banks default insurance was selling for nearly a nearly 50% premium in the last few weeks.

I would not expect too many smiles.

Look for strong selling activity on the markets across the globe on November 4 and 5, the dates Landsbanki and Glitnir will see their former debt hit the auction house. Once again, CDS sellers will be forced to liquidate their portfolios (hundreds of billions of dollars worth) in order to pay their insurance guarantees.

It will be an interesting week for the global markets.

Some investors may believe the panic selling is over. It is not. As more and more debt hits the auction block, even more investors will be forced to cash out of the markets, creating another round of harsh sell-offs.

Source: Iceland’s CDS Market Will Create More Turmoil