Western European CDS spreads have experienced a relatively stable quarter, despite receiving news that Cypriot banks – after taking a hit on their investment in Greek bonds – were insolvent, according to S&P Capital IQ’s latest quarterly Global Sovereign Debt Credit Risk Report.
A last minute bail out of Cyprus prevented a default as upfront prices fluctuated 7pts towards the end of the quarter. However, default risks remain high at 70 per cent over five years, according to the report.
Meanwhile in the UK, spreads widened to 55bps after the much anticipated credit rating downgrade, but finished the quarter strongly at 45bps, as a mix of austerity measures and bond purchasing continue.
Elsewhere, US CDS spreads remain unchanged on the quarter while the market continues to assess the impact of when the US ceases the USD85bn monthly bond repurchase program.
“The cost of debt protection remained relatively stable in the top 10 least risky sovereign credits, with Germany moving 5bps tighter and CDS spreads in New Zealand coming into line with Australia”, says Jav Bose, head of derivative valuations at S&P Capital IQ.
The first quarter of 2013 was relatively stable if the handful of outliers - namely Argentina, Egypt, Slovenia, Hungary and Cyprus, are excluded. CDS spreads in Ireland tightened a further 14 per cent, closing at 189bps, with Iceland tightening 11.3 per cent, closing at 166bps and Abu Dhabi leading the charge and tightening a further 17.3 per cent closing 70bps.
Emerging Europe ended the quarter 16 per cent wider overall, the worst performing region of the quarter, as concerns on the health of Slovenia’s banks see the cost of protection surge 58 per cent. Hungary and Croatia widened more gradually, accelerating towards the end of the quarter following news of the problems of Slovenia’s banks, ending +41 per cent and +33 per cent respectively.
“Globally, focus in Q2 2013 will be on protection levels in Eastern European countries and the potential impact on the Eurozone, and Argentina where default probability surged this quarter”, says Bose. “Venezuela is another country capturing the headlines, as its leadership under Chavez finally came to an end this quarter. However, the cost of protection still remains wide, closing the quarter at 740bps, 15 per cent wider on the quarter.
“Perhaps a little surprisingly, Brazil also widens to 137bps, as it braces itself for both the World Cup and the Olympics in the next four years.”