Wednesday, December 02, 2009

Country Default Risk

The Dubai debacle has prompted Bespoke Research to put up the various country risk of default. There are CDS being traded that measures the cost of insuring $10,000 of country debt for 5 years. If you look at the table, Dubai's cost is $541, which is comparatively a lot better off than say, Argentina $985, Venezuela $1,170. However, $541 is a very very high figure. You can get a sense of just how global traders view Dubai's risk of default by looking at countries that are a bit cheaper to insure: even the hellish Iceland is at just $398, however that has dropped from a highly precarious $976 at the end of 2008; the problematic Russia cost only $218.

Surprisingly, Indonesia's risk to insure is very high at $231. Malaysia looks like a hero among these countries, costing only $117. The risk traders are not stupid, they do look at everything, they have China at just $87.

The USA still have its reserve status firmly intact, despite the recent rumblings over the dollar and the furiously overworked money printing press by the Fed, it only cost $32 to insure. Australia is at a highly enviable $34.

I should really start to trade these country default CDS. I think on a 12 month view, my likely preferred trades in my order of attractiveness would be:

1) Buy Japan at $81 (buy as in hoping that the cost to insure would go much higher over a 12 month period).

2) Buy US at $32.

3) Buy Australia at $34.

4) Sell Indonesia at $231.

5) Buy Egypt at $241.

6) Buy Mexico at $159.

7) Sell the Philippines at $208.

Funnily enough, I cannot really place a bet on Malaysia, don't really have a strong clue up or down Even curiouser was that I have a better sense of countries where their risk is seeming rising, but not as strong a conviction for countries on the improve.

Oh, to explain my top 3 bets: Japan's public debt is actually quite insurmountable and is reaching a climax - they keep having to change the Prime Minister because no one has the political will to effect the changes, something's gotta give soon; the USA reserve status is overstated, and while I think the status will remain, it won't be as strong as before and a gradual realignment is necessary (i.e. weaker dollar) to get the country on a proper debt reduction diet; Australia's euphoria is largely centered on China's state funds voracious appetite for resources, I do not expect that to go unabated, a lot more downside than upside from here, I expect the OZ government to be a bit more restrictive in "selling natural resources" to China in the months ahead.


p/s photo: Olivia Ong


easystar said...

Hi SD,

Perhaps you want to put in a risk warning to whoever contemplating selling this sort of CDS just in case one of thee do default?

These stuff goes in block of $10m. Collecting $30 - 200k with the risk of going completley bankrupt (despite the small risk) isn't particularly interesting thing to do..

Low said...


Something unrelated here, but do you think investing in unit trusts can take the emotion out of investing? At least to a certain extent?


bindi said...

Portugal, Greece and Spain showed a reduction in its risk value - which to mey personal opinion is not reflective of the current environment.

yusuf bhai

Salvatore_Dali said...

low... no

bindi, agreed


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