CMA Features in Central Banking Magazine
Jul Tue 13 2010 at 9.21 am
CMA, the credit information specialist, is pleased to provide an article from the respected publication, Central Banking, addressing some of the sovereign CDS issues of the second quarter of 2010.
For more information please visit the Central Banking website
Greek debt crisis sparks widening of almost all global CDS spreads
By Yusuf Yassin
The risk of a Greek default almost doubled as a result of the European sovereign debt crisis a report by the Credit Market Analysts (CMA) said on Monday.CMA's Global Sovereign Credit Risk Report showed the spread on the five-year credit default swaps (CDS), the cost of protecting against a default for five years, on Greek government debt increased by more than 657 basis points, or 190%, from 346 basis points in mid-April to 1,003 basis points in mid-June.The report noted that towards the end of the quarter, Greece temporarily overtook Venezuela as the sovereign judged to have the highest probability of defaulting. However, by the end of the quarter the cumulative probability of default showed there was a 55.6% chance that Greece will default in the next five years while there was a 58.7% chance of that Venezuela would. Greek paper is now judged to be the world's second riskiest paper to hold only after Venezuela, the world's riskiest, with a spread at 1306 basis points as of mid-June.Out of the seventy sovereign debt risk profiles measured in the report, 93% reported a widening in the spread on CDSs with western Europe the worst affected. The cost of protection against Belgium ballooned by 168%, by 129% in Spain, and in Portugal by 127%.CDS spreads, which are based on sellers' judgments on the probability of default, have soared on Greek bonds since the extent of the Mediterranean country's debt troubles became public at the end of last year. With no single Western European country recording a tightening in sovereign CDS this quarter the data supports the growing contagion witnessed in Europe over the last year and indicates sovereign credits remains the central focus for sovereign debt risk.Nordic countries remained the most insulated from the worst effects of the global debt crisis. The best performer was Iceland, its CDS spread tightening by 17%, from 401.7 in April to 333.4 in June. The United States was also one of eight countries showing an improvement in the second quarter, with the CDS spread narrowing 2.4% following a rally in US Treasuries. Norway continued to be judged as the world's safest sovereign debt to hold with the rate on its five-year CDS at 26.7 basis points.In the Middle East, Egypt was the best performer in the region, tightening by 15%. The cost of insuring against a default in Dubai exceeded that of Iraq for the quarter. In Asia, South Korea was the worst performer widening 64.4% as tensions with its northern neighbour increased. Vietnam was the best performer with the spread widening by only 1.2%.