CDS

Investors in Ukrainian bonds have heaved a collective sigh of relief over the past few days – or, if not that, they have at least moved further away from the threat of default, if the recent retraction in bond yields and CDS spreads is any guide. But even in the darkest days of last week when Ukrainian yields soared to panic levels, investors could have taken one grain of comfort. Things, after all, could have been worse: they could have invested in Venezuela. 

Help!

It is what Ukraine least wants. Just as the country gets closer to signing an economic and political pact with the EU, investors have got the jitters about its creditworthiness.

The cost of insuring Ukrainian debt – as shown by the price of credit default swaps – has hit a three-year high after Moody’s downgraded the country to Caa1 on Friday. The cost of a five-year CDS jumped for a third day in a row on Thursday, to 1037 basis points. 

Here’s a question: why are Egyptian equities and Egyptian CDS spreads moving in tandem? In normal circumstances, you’d expect them to move in mirror image of each other. If equities go up, you’d think investors were optimistic about the country’s prospects (good); if CDS spreads go up, you’d think they viewed default as increasingly likely (bad).

So if both go up, is that good or bad? 

Argentina’s holdout saga is turning, in many market participants’ eyes, into a question of when, not whether, the country sinks into a technical default.

So if emergency appeals by Argentina and the holders of restructured debt fall on deaf ears in the Second Circuit Court of Appeals and New York Judge Thomas Griesa’s November 21 ruling stands, (in which he ordered Argentina to pay its “holdouts” $1.3bn by December 15, the day it must make payment to restructured debt holders), the question is, what happens next? 

That’s one step in the right direction. Turkey’s upgrade by Moody’s gives the country a rating that is more in line with market prices.

But overall, sovereign debt ratings and prices of credit default swaps, for example, are increasingly out of whack. That’s the conclusion of Nomura analyst Olgay Buyukkayali in a note entitled The Great Rating Conundrum

Balcerowicz: envious of the neighbours

Poles have long held a fascination with the next-door Czechs as an exemplar of hard-headed economic virtues that their own more romantic country would be wise to follow – something that arch-reformer Leszek Balcerowicz referred to when calling on countrymen to tackle more reforms, pointing out that Czech borrowing costs were lower than Poland’s.

The latest cost of 5-year credit default swaps (the cost of insuring against default) for the Czech Republic is 127.1 basis points, not far above Germany’s 107.1, while Poland is at 239.7bp (albeit far below Spain and Italy and in a different universe from Greece). 

By Kristina Mikulova in Bratislava

Markets are hopeful that Slovakia’s newly re-elected premier Robert Fico will back off from hacking away at earlier liberal economic reforms, but in a conversation with beyondbrics, he made clear he is sticking to his campaign promises. They include scrapping the flagship policy of previous centre-right governments, the 19 per cent flat tax, while protecting social benefits – disregarding the advice of a blue-ribbon panel of economists.

“If our economic reforms fail, the people will forgive us. But they will not tolerate being lied to,” Fico said, stressing that his voters gave him a his overwhelming mandate to protect social security. But how sharp Slovakia’s turn left will be remains to be seen. 

India’s credit default swap market has finally kicked off. The country’s first CDS deals, worth an admittedly insubstantial $1.9m, were made on Wednesday between ICICI Bank and IDBI Bank, according to Reuters. Although small, the deal means the market is at last operational. 

Another round of talk in Mumbai that the long-awaited launch of a market for credit default swaps is imminent, despite concerns that the products helped exacerbate the both the 2008 global financial crisis and the current eurozone turmoil. 

Clue: it’s not Venezuela.

Answer after the break.