CDS REPORT: European emerging sovereigns under pressure
by David Oakley
European emerging market credits came under pressure on Wednesday as risk aversion continued to plague the financial system.
With the International Monetary Fund considering bailouts for Ukraine, Turkey, Hungary, and Serbia, these countries’ credit default swaps widened further because of the growing perception of risk in investing in these so-called high-yielding nations.
Ukraine, which is expected to seal a deal of between $10bn and $50bn with the IMF soon, has seen its CDS price rise to record levels, with bid-offer spreads very wide, reflecting the illiquidity in this market.
The latest CDS bid-offer spread on Ukraine was 1,793bp to 2,093bp. Every 1bp is equal to a cost of 1,000 euros to insure 10m euros of debt over five years.
Nigel Rendell, senior emerging markets strategist at RBS Capital Markets, said: “You can drive a bus through these spreads, they are so wide - and a bendy bus at that.”
Other countries that have seen CDS prices rise sharply this week include Hungary, which is trading at around 520bp, up around 50bp since the start of the week, Serbia, which has a price of around 450bp, and Turkey, which has a price around 700bp.
Traders are no longer quoting CDS prices on Iceland, which has in effect defaulted and is also awaiting on the IMF to help kickstart its hobbled economy.
The IMF is considering rescue packages for all these countries, which have high current account deficits and weakening economies.
Separately, the iTraxx Crossover index, which is made up of 50 mainly high-yield credits and is considered the best gauge of sentiment, was trading around 780bp, close to the Tuesday close.
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