Country Default Risk Updated

Bespoke: The European aid package announced over the weekend has helped boost global equity markets across the board, and it has also caused sovereign debt default risk to decline significantly over the past two days. Below we highlight 5-year credit default swap prices ($, bps) for a number of countries around the world. For each country, we highlight where default risk stands now, where it was last Friday before the bailout, and where it was at the start of 2010 and the start of 2008.

Heading into the weekend, Portugal, Italy, Greece, and Spain (PIGS) had seen huge spikes in default risk in 2010, but they have all seen declines of 30% or more over just the last two days. Default risk for Portugal and Greece has basically been cut in half. CDS for other EU countries like Germany and France had also spiked significantly prior to the weekend, but they have since returned to much more normal levels.

Venezuela and Argentina currently have the highest default risks in the world, while Germany, Australia, and the US have the lowest default risk. The US hasn't seen a big decline in default risk this week, but that is because it barely moved higher even in the face of volatile markets last week (why the US even has CDS is a different topic).

My Take: Malaysia is at 90.9. Its a meaningless figure unless you look at where you stand or rather whom you are standing next to. Japan is at 80.1, surprisingly we are above Chile which stood at 87, I guess they have lots of oil. Take comfort in that Thailand is at 120. UK drew closer to us at 85. Indonesia is at 178. Belgium is at 88.7. The Philipines is at 169. China is at 72. We are lower than South Korea which came in at 101.



Sometimes we get into a lot of internal bashing and politicking, and we are not thankful enough of where our country is fiscally. Yes, I agree wholeheartedly that we could have been so much more and so much better. Still, it is gratifying to note that we are not in "real danger" of a country default - OMG, can you imagine if we are at 200 or 300.

Here are some notables: Dubai at the ominous 444, Vietnam at 252, Argentina at 921 ....

Funnily though, with the World Cup coming soon, most of the participating nations are also the ones with the more perilous debt ratings:
Argentina 921
Brazil 127
Mexico 125
South Africa 153
Portugal 229
Greece 533
Spain 165
Italy 145

So, the key to having a great footballing team is to be fiscally irresponsible???
; )

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