sovereign CDS

Not one eurozone country deserved a credit rating upgrade in the past quarter, while some, such as Spain, deserved six-notch downgrades, new data show. Indeed, 13 of the worst-performing 15 countries were European (see Q-o-Q change column; source: CMA data).

The UK, by contrast, did deserve a one-notch upgrade. (The bad news is that even an upgrade leaves the UK’s implied rating one notch below its actual rating of AAA.) Far greater winners were Guatemala, Uruguay, Egypt, Bahrain and Colombia, which all merited multi-notch upgrades. 

Six financial firms have apparently been singled out for speculating on Greek debt during the crisis of confidence that has hit the eurozone.

In a hearing with the Finance Commission at the French National Assembly, which was closed to the press, Lagarde reportedly told French lawmakers that the six institutions are all anglo-saxon, a word French politicians and media use to designate US and UK-based companies. 

Apparently, the Spanish intelligence agency has been enlisted to help find out what is behind recent “speculative attacks” in the financial markets.

The Economic Intelligence Unit – created to defend the economic, commercial and industrial sectors in Spain – wants to know whether investors’ behaviour and “Anglo-Saxon media aggression” can be explained by market fundamentals, or whether something more sinister is behind the moves. 

Sovereign debt in Dubai is seen as riskier now than it was last November, during the Nakheel crisis. The cost of insuring Dubai debt is now 6.62 per cent*, meaning it costs $662,000 to insure $10m Dubai sovereign debt against default. A month ago today, it cost $415,000. But current rates are some way off their highs a year ago, when it cost $940,000.

Markets are pricing in more risk after news emerged that creditors of Dubai World might receive just 60 per cent of their investment back. The rising cost of insurance is not due to illiquid trading: Dubai CDS volumes are high and increasing (see chart). 

Traders are gossiping about a ban on sovereign credit default swap trading, to avoid a Lehman-like collapse. Quite how such a ban would work is mystifying:

I’m hearing and being asked from a few sources that the CDS markets in the sovereign (Greece, Dubai etc.) nations are going to “banned” from trading to avoid a BSC or LEH like collapse. I personally have no idea if there is any truth to the story but it seems to be just going around in the last half hour. Obviously Greece is on the forefront of traders’ minds. 

Someone trading credit default instruments is getting a bad deal.

Governments are riskier than corporates, apparently. The cost of insuring against government default is pricier than the equivalent for companies, if credit default swaps are anything to go by. The news comes hot on the heels of a question posed by Michael Gordon last week: namely, whether government bonds should really be considered risk-free.

This should seem crazy. Governments and companies are not equivalent financial actors. Governments can raise tax, and go to war. But financial products whose value derives from these actors may be similar. This apparent disconnect should act as a warning to those who genuinely want to insure against default. The question is: are you interested in the default of a government/company, or are you just speculating? 

What connects computer screens, green cars and military power? Rare earth elements, required for the manufacture of many advanced technologies, from hybrid cars to guided missiles. China enjoys 98 per cent of REE production, cornering the market after a single US mine was closed in the mid 1980s. Chinese companies have bought stakes in Australian and Canadian rare earths prospects and have tried unsuccessfully to buy the still idle US facility.

The debt load of Eastern Europe is apparently putting off investors. But there is worse news for rich countries: investors are betting that rich countries will default on their bonds