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 ..lol. 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