Western Europe sovereign risk relatively stable as emerging Europe widens according to S&P IQ report

16th April 2013

Argentina is the country with the riskiest sovereign credits and the risk is growing though Cyprus remains second with the Skandinavian countries posing the lowest risk according to the latest S&P Capital IQ report.

Western European Credit Default Swaps spreads have experienced a relatively stable quarter, despite receiving news that Cypriot banks – were insolvent, according to S&P Capital IQ’s latest quarterly Global Sovereign Debt Credit Risk Report.

A last minute bail out of Cyprus prevented a default as upfront prices fluctuated 7pts towards the end of the quarter. However, default risks remain high at 70 per cent over five years, according to the report.  Meanwhile in the UK, spreads widened to 55 basis points after the much anticipated credit rating downgrade, but finished the quarter strongly at 45 basis points, as a mix of austerity measures and bond purchasing continue.

US CDS spreads remain unchanged on the quarter while the market continues to assess the impact of when the US ceases the $85bn monthly bond repurchase program.

The report lists the riskiest countries with Argentina the riskiest and with rising risk. Cyprus is second. Egypt is getting increasingly according to the report.

Top 10 Most Risky Sovereign Credits

Source: S&P Capital IQ CDS

POSITION Q1 COUNTRY 5 YEAR CPD (%) 5 YEAR CDS MID (BPS) PREVIOUS RANKING

1

Argentina

84.5%

4088

1 – No change

2

Cyprus

70.0%

1408

2 – No change

3

Pakistan

49.9%

933

3 – No change

4

Venezuela

41.3%

740

4 – No change

5

Egypt

39.1%

690

7 – Down 2

6

Ukraine

34.8%

594

5 – Up 1

7

Portugal

31.2%

409

6 – Up 1

8

Iraq

28.9%

479

8 – No change

9

Lebanon

26.3%

418

9 – No change

10

Tunisia (Proxy)

24.8%

393

New entry

The least risky

“The cost of debt protection remained relatively stable in the top 10 least risky sovereign credits, with Germany moving 5bps tighter and CDS spreads in New Zealand coming into line with Australia” says Jav Bose, Head of Derivative Valuations at S&P Capital IQ.

The first quarter of 2013 was relatively stable if the handful of outliers – namely Argentina, Egypt, Slovenia, Hungary and Cyprus, are excluded. CDS spreads in Ireland tightened a further 14%, closing at 189bps, with Iceland tightening 11.3%, closing at 166bps and Abu Dhabi leading the charge and tightening a further 17.3% closing 70bps.

 

Top 10 Least Risky Sovereign Credits

Source: S&P Capital IQ CDS

Position Q1 Country 5 Year CPD (%) 5 year CDS Mid (bps) Previous Ranking

1

Norway

1.9%

21

2 – Up 1

2

Sweden

2.0%

23

1 – Down 1

3

Finland

2.9%

33

3 – No change

4

Denmark

3.1%

34

4 – No change

5

USA

3.3%

37

5 – No change

6

Germany

3.3%

37

6 – No change

7

Switzerland

3.6%

40

8 – Up 1

8

Australia

3.7%

43

New entry

9

New Zealand

3.8%

44

New entry

10

Austria

3.9%

44

9 – Down 1

With worries about Slovenia, emerging Europe is seen as increasingly risky. The report points out that Emerging Europe ended the quarter 16% wider overall, the worst performing region of the quarter, as concerns on the health of Slovenia’s banks see the cost of protection surge 58%. Hungary and Croatia widened more gradually, accelerating towards the end of the quarter following news of the problems of Slovenia’s banks, ending +41% and +33% respectively.

Bose adds: “Globally, focus in Q2 2013 will be on protection levels in Eastern European countries and the potential impact on the Eurozone, and Argentina where default probability surged this quarter. Venezuela is another country capturing the headlines, as its leadership under Chavez finally came to an end this quarter. However, the cost of protection still remains wide, closing the quarter at 740bps, 15% wider on the quarter. Perhaps a little surprisingly, Brazil also widens to 137bps, as it braces itself for both the World Cup and the Olympics in the next four years.”

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