Latin America widens in Emerging Market selloff as US improves and Nordics continue to remain tight in CDS, shows S&P Capital IQ Global Sovereign Debt Credit Risk Report Q2 2013.
* Argentina remains the most risky sovereign globally despite it tightening 23% over Q2
* US is the best performer in the quarter as spreads tighten to 27bps from 37bps
* UK enters top ten least risky sovereigns at number nine
“The quarter was eventful and volatile, with civil unrest taking place in Brazil, Turkey, Egypt; political tension in Portugal; slowing growth in China and news that the US Federal Reserve Bank (Fed) might start tapering quantitative easing – which prompted the start of a near doubling of interest rates and a remarkable selloff in Latin America and Asian Emerging markets” said Jav Bose, Head of Derivative Valuations at S&P Capital IQ.
Credit Default Swaps in the US tightened 27% to 27.5bps as the world’s largest economy continues to improve. The Nordic region overall remains the least risky in terms of CDS implied default probability.
S&P Capital IQ’s analysis notes that Central & South America ex Argentina credit default swaps widened 45% on average in the quarter with spreads in Brazil approaching 200bps, a level not seen since October 2011.
While remaining in the top ten, Portugal’s spreads managed to finish the quarter 4% tighter, even though the coalition government was on the verge of collapse as recession, high unemployment and a widening budget deficit, prompted the finance minister to resign. Q3, however, has seen a return to the widening of spreads.
However, Western Europe tightened 10% overall in the quarter, as positive economic data in Italy and Spain saw spreads tighten in these two important economies in Europe. While Italy and Spain don’t make the top ten least risky sovereign list, the UK and Czech Republic do, having edged out Australia and New Zealand as CDS spreads widened above 50bps. CDS spreads in the UK remained fairly stable over Q2, as it adjusts itself for new Governor of the Bank of England, Mark Carney.
S&P Capital IQ’s analysis has revealed that there was no change in the top 3 least risky sovereign credits (Norway, Sweden and Finland respectively) which all end the quarter at 2-3bps tighter. The region continues to be the safe haven place to be in terms of Credit Default Swaps, as spreads tightened 11% overall.
The US climbed up a position to fourth as spreads tightened to 27bps from 37bps. This meant that it was the best performer in the quarter, aided by unemployment dropping to 7.6%, edging closer to the US Fed’s target of 7%.
“US fiscal policy seems to be working, as the world’s largest economy enjoys an improving employment rate, higher stock prices and a general bullish outlook from top CEOs.” Continued Jav Bose.
“This is in contrast to China which saw CDS levels widen to 118bps as the growth rate slows and approaches 7.5%, topping the largest percentage widener table.”
Note: CPD is a function of the recovery level which varies according to several factors and distance to default, e.g. emerging markets assume 25%.
The full report is available at: