Showing posts with label euro area CDS. Show all posts
Showing posts with label euro area CDS. Show all posts

Sunday, January 20, 2013

20/1/2013: Euromoney Credit Risk Data: Q4 2012



All of the G10 countries, with the notable exception of Sweden, saw their risks rise in 2012, according to the latest results from Euromoney’s Country Risk Survey – and not just because of the problems affecting the debt-ridden euro zone sovereigns.

ECR (Euromoney Country Risk survey data for Q4 2012 is out and the results are quite interesting. Broadly they confirm the risk dynamics traced by the survey through the entire 2012, suggesting that qualitatively little has changed over 12 months to signal the improvements in the global economic environment.  Here are some top-line results:

  • Of G10 countries, all but one (Sweden) saw further deterioration in ratings.
  • G10 ratings deteriorations were not only driven by the continued euro area crisis, but are also present in the case of Japan, the US, and the UK own dynamics.
  • Japan and the US continued "on a downward trend, as various economic and political problems continued to raise alarm bells among economists and country-risk experts regarding their medium-to-long term fiscal viability…"
  • "Japan’s crippling debt problems, stunted growth and deflation have seen its score fall to 65.5 out of 100 and to 32nd out of 185 countries surveyed – a new record low, when 20 years ago Asia’s former powerhouse was ranked the world’s safest sovereign."
  • US scores were down 1.6 points over 2012 to 74.7. 
  • "…The US is far from a substantial risk – it is, after all, the 15th safest sovereign in the world, according to the survey. However, US politics has had a decidedly negative influence on its risk profile – all six of the political risk indicators were downgraded in 2012".
  • On December 'deal' reached by the US Congress and the White House: "The two sides in the debate must still find common ground to negotiate $110 billion of spending cuts (the “sequester”) without bringing the US economy to a grinding halt. A budget must be agreed, while raising the $16.4 trillion debt ceiling even further presents another, even more perplexing, question of how to ensure medium-to-long term fiscal sustainability in light of adverse demographics – the weakest of the country’s structural factors, according to the survey."


Realting to two major themes I have been highlighting for some time now:

  1. The fallout of the euro area from the global growth & growth environment clusters; and
  2. The relative rise in risk quality in the 'Southern' growth clusters, leading to relative convergence in risks between the deteriorating 'North' (advanced economies of the West) and the improving 'South' (the middle income and some emerging economies of Asia-Pacific and Latin America)
we have this:


  • "Risk differentials between the G10 and the emerging market regions narrowed by between two and three points in 2012, to 25 points for the Middle East and to 30 points each for Asia and Latin America." This is a notable result, coincident with one major theme in global risk changes that I have highlighted for some time now.
  • "Differentials between the eurozone and emerging markets saw even larger shrinkage, highlighting that, although traditional markets are still safer, their comparative advantages have diminished."
  • "Some of the emerging markets became safer in 2012: those that were largely decoupled from Europe’s debt problems – growing rapidly in many cases – and with fewer domestic issues." 
  • "Latin America saw three distinct patterns emerging. Brazil, Chile and Colombia continued their long-term ascent in the global rankings, despite having their economic scores shaved by a slowdown in China paring back commodity demand. Argentina and Venezuela struggled with their domestic crises, which caused both countries to slide further down the rankings. Mexico, Peru, Uruguay and Bolivia all emerged on the radar, benefiting from strong policy management, good growth and other factors."



A special place in the risk rankings 'hell', however is reserved for the euro area:

  • "Eurozone countries, …saw shrinking levels of confidence as Slovenia, Cyprus, Spain and Italy endured the largest falls in country risk scores of any of the countries surveyed worldwide, weighed down by creaking banks, rising debts, contracting economies, and the political and structural dimensions to the crisis."
  • "The eurozone score fell by 3.1 points, the largest drop of any of the main geographical or economic regions."
  • In the case of largest downgrades within the euro area: "All four saw their risks continue to rise during the fourth quarter, despite some progress in tackling their fiscal problems. Bond yields fell and credit default swap (CDS) spreads tightened, suggesting the risks had eased, but ECR has had reason to doubt CDS signalling." Which is the theme consistent with my analysis of CDS in the past.
  • Of the peripherals: "Italy, down 14 places in the global rankings this year (to 51st place), Spain (an 18-place faller to 58th), Cyprus (down 11 to 42) and Slovenia (plunging 15 places to 37th) all failed to convince country-risk experts that the worst of the crisis was over."
  • The crisis is now perceived to have spread from purely financial and fiscal dimensions to political and structural: "The systemic banking sector and sovereign debt problems stretching across the single currency area have invariably influenced economic risk assessments. However, the political and structural elements to the crisis have resulted in broadly equivalent falls in scores for each of the three measures of risk, on a euro-wide basis."




  • On ECB actions: "...in the absence of growth and amid justifiable concerns about the political commitment to budget consolidation and reform – highlighting the risks of policy execution failure – fiscal projections have proved wildly optimistic, deferring the prospect of outright debt reduction for many countries." In other words, while ECB can talk as much as it wants (OMT, the inevitability of the euro etc), end-game is set by real actions. And these are now increasingly in question.
  • "Peripheral country risk remains high, even in Greece, which has seen its ECR score stabilize this year, yet on a score of just 34 points and languishing in 110th place on the ECR scoreboard, the country’s problems are far from over… All of Greece’s economic and political factors, 11 in all, score less than five out of 10 as another future debt rescheduling looms. The much-feared Grexit is still not out of the question either, although the markets have been calmed by the progress achieved to date."
  • "Debt resolution programmes in Spain, France and other countries are all being questioned."


You can see (subscribers only) the data and play with interactive charts and maps here and the overall site for the data is www.euromoneycountryrisk.com.

Monday, July 30, 2012

30/7/2012: Grazie, Sig Draghi?

So Mr Draghi made some serious sounding pronouncements last week. The markets rallied. Over the weekend, more serious sounding soundbites came out of Mr Juncker. The markets... oh... still rallying? And thanks to both, Italy had a 'Successories'-worthy auction today am:

  • Italy 5 year CDS fell 20bps to 478 (lowest since early July) prior to the auction
  • 5 year bond sold at yild 5.29 (against 5.84 in previous) with bid/cover of 1.34 (down on 1.54 achieved in previous auction) and maximum allotment of 2.224bn out of 2.250bn aimed
  • 10 year 2022 5.5% bond sold at 5.96% yield (previous auction 6.19%) and bid/cover ratio of 1.286 (against previous 1.28) with allotment of 2.484bn out of 2.5bn planned.

Grazie Sig Draghi?

Now, wait a sec. Yes, there's an improvement. But on less than €4.7bn of issuance... and Italy needs are:

(Source: Pictet)

And hold on for a second longer:

  • Italy's net debt financing cost was at 4.721% of GDP in 2011 with debt/GDP ratio of 120.11% which implies effective financing rate of 3.931%
  • Of course, a single auction does not lift this up in a linear fashion, but... if Italy had troubles with 3.9%, should we not be concerned with 5.29%?
  • Let's put it differently: Italy's GDP grew in 2010-2011 by 1.804% and 0.431% respectively. Over the same period of time, Italy's government debt net financing costs went from 4.236% of GDP to 4.721% of GDP. This year they are set to rise to over 5.36% of GDP as economy is likely to contract ca 1.9-2.0%.
So maybe (I know, cheeky) cheering the current yields is a bit premature? Eh?

Wednesday, March 14, 2012

14/3/2012: Daily CDS moves

On the foot of yesterday's widening, CDS for Belgium and Italy posted very significant, close to 5%+ tightening. Portugal is now clearly euro area's 'second weakest prey' and the lions are out, still hungry after Greece:


Nice tightening on Germany - down 5.34% and that amidst rising US yields. Albeit, of course, it is harder now to price CDS post-Greek fiasco, so demand is probably being compressed while supply is on the rise due to adverse impact on overall demand/supply balance in pricing CDS as insurance contracts (which they are not, not after Greece).

All data courtesy of CMA.

Tuesday, March 13, 2012

13/3/2012: CDS moves

On the day Fitch upgraded Greece to B-/Stable from selective default rating, some PIIGS continued to get hammered: 5 year CDS moves with implied probability of default:

Courtesy of CMA.

And per @forexlive - here's analysis of the Fitch move:

"Fitch has begun rating Greece’s new issues at B-, which is deeply into ‘junk’ territory. To put that in perspective, it’s eight notches below Ireland, which Fitch has rated at BBB+ and six notches below Portugal at BBB-. It’s also below Rwanda, Argentina and Ukraine. The current yield on the new 10-year benchmark is 19.01%."

Yep, markets have a strange 'memory'...

Thursday, February 9, 2012

9/2/2012: Few bothers

Today's mid-day CDS spreads (courtesy of CMA):

This should bother few sovereigns:
 and few banks:


And is likely linked to Greek bailout costs falling on: France, Netherlands, and Finland while doing nothing good to over-indebted Belgium and Italy and leading to a slowdown in Norway and Denmark... while taking a bite out of the balancesheets of few big banks. And that comes on top of markets already expecting the fallout from the Greek deal...