Updated Ranking of Global Credit Default Risks

Consistent with my earlier post, FT’s James Mackintosh: US Credit Risk Greater Than Indonesia, Bespoke Invest has updated tables of the 5-year Credit Default Swaps (CDS) reflecting on default risks of 60 countries.

On a year-to-date basis, Greece has the highest default risk while the US has seen a hefty nearly 20% increase.

Major ASEAN nations have also seen an uptick in default risks with Thailand registering as the worst performer.

Meanwhile major European economies posted most of the improvements over the same period.

But it’s a different view when seen from the ranking in terms of CDS prices.

The biggest improvements seen among European nations have been as consequence to the previous actions, where the nations affected by the PIIGS crisis have led to a contagion as seen with the prior price surges.

And almost along the lines of Newton’s second law of motion, where for every action there is an equal and opposite reaction, the previous steep increases has prompted for equally substantial declines.

What this seems to suggest is that the Greece crisis appears to be isolated for now.

And Europe's performance can be measured relative to the major ASEAN economies. While CDS prices of the ASEAN contemporaries did suffer some deterioration, in the context of prices, ASEAN CDS remains below the levels compared to the prices of nations affected by the PIIGS crisis.

So the above only reveals of the degree of price volatility or the rapid changes in the market’s perception of credit risks.

As Bespoke notes,

The countries that investors believe are least at risk of default are currently Norway, Sweden, Finland, and Denmark. The US used to be the least at risk of default, but CDS prices here have ticked up 20% so far in 2011. US default risk is still low relative to the rest of the world, but any tick higher is something we don't want to see.

Credit rankings can shift swiftly and meaningfully. All these depend on the policies adapted.

So far, the practice to inflate debt has subdued default risk concerns on some the major economies as the US. However, the law of the late economist Herb Stein should apply “If something cannot go on forever, it will stop”.

Greece Default Risk At New Record, No Contagion

The default risk of Greece, represented by the Credit Default Swaps (CDS), has just traded at new record highs.

The elegant chart and subsequent table below from Bespoke Invest.

With the current surge, Greece has now supplanted Venezuela as the riskiest nation with the likelihood of a default, as shown below.

Additional comments

1. The credit risk table shows that it has been a bipolar world. Emerging markets have mostly been down (diminishing perception of credit risks), since December 31, 2009, while developed economies have been up (higher credit risks mostly from the after effect of the 2008 crisis).

2. The Greece episode which used to haunt the world markets (in 2010) appears “contained” or has become uncorrelated today.

(from stockcharts.com) Move along, nothing to see here

So far the Euro, the Europe’s Stoxx 50 (Stox50) and major global equity index (DJW) has virtually ignored the Greece rumpus unlike in 2010.

The lessons:

This highlights the dynamic where:

Past performance do not guarantee future outcome.

Markets learn to discount risks.

Global central bank’s flooding of money has so far temporarily masked whatever credit woes that have plagued the PIIGS.

It’s a complex market with variable interplaying factors. Oversimplification leads to misdiagnosis

Global CDS Review: Unclear Debt Default Contagion Causality

An updated chart from Bespoke Invest should provide us a better perspective of the actual state of the supposed concerns of "debt default risk" as the cause of the market's current turmoil.
According to Bespoke Invest, ``Portugal has seen the biggest spike in default risk this year with a gain of 145.5%. France ranks second at 87.7%, followed by Iceland, Germany, and Australia. Surprisingly, CDS for US debt has spiked 49.4%, which is more than both Dubai and Greece. (Why they even have CDS for the US and other large developed nations is a different story, and we're just highlighting where things stand.) While France, Germany, Australia, and the US have all seen pretty big spikes in default risk this year, they still have the lowest default risk of all the countries highlighted. Egypt, Lebanon, and Venezuela are the only countries that have seen default risk decline so far in 2010."

One thing to keep in mind is that reading market indicators, as the table above, can be reference-point sensitive.

As pointed out by Bespoke, even as Germany, US, France and Australia have topped the lists in terms of credit concerns (based on a year-to-date basis), as developed economies, their nominal CDS prices remain way below those of emerging markets.

So a spike in developed economy CDS could be interpreted as a nonevent.

Yet like Iceland and Greece, which used to have a low risk developed economy rating (see 2008 as reference), soaring CDS have placed them above many (high risk) emerging markets. So it would be a mistake to read past performances as indicative of future outcomes.

In short, the picture changes depending on the reference points used to justify a scenario.

Here is another example: Based on 2008 as the benchmark, Venezuela, this year's top performer, despite the incredibly high priced CDS, appears to be one of the least affected by present credit concerns behind Lebanon, Indonesia, Kazakhstan, Columbia, Philippines, Turkey and Brazil.

I haven't had time to check, but my assumption is that most of the stock market indices mentioned above suffered as much losses as those whose credit risks have surged.

In other words, dissonant signals from this week's market meltdown do not suggest that this is mostly about "debt default" concerns. The contagion doesn't justify the same impact on least affected countries.

And it would similarly be too simplistic to suggest the following causal impact: higher debt default risk=deleveraging=commodity meltdown=emerging stocks freefall. This redounds to available bias and to the post hoc ergo propter hoc fallacy or as per wikipedia.org-"after this, therefore because (on account) of this".

Beyond the surface, we read that it is likely the squall that hit financial markets could instead be signs of affliction from a liquidity addiction based "withdrawal syndrome".

Dubai Blues As Seen In CDS, It's All About Perception!

A cliche goes, 'what you see depends on where you stand'.

For many, this could be rephrased as 'what you see depends on what you are looking for'. In the behavioral aspects, this means looking to confirm a bias or selective perception. For the bears, the Dubai incident has served as a rallying cry for their much awaited deflation blow-up scenario.

The chart from Bespoke exhibits on the default risk as measured through the Credit Default Swaps (CDS) on a year to date basis for 39 nations.
For a clearer image press on the link.

According to Bespoke, "we highlight current credit default swap prices and the year-to-date change for the sovereign debt of 39 countries. As shown, default risk has declined for every country except Japan in 2009, including Dubai."[underscore mine]

What this means is that despite the present turmoil, default risk measures haven't reached or is quite distant [yet] from the magnitude as it had been at the start of the year.

So unless the succeeding events deteriorate more, this volatility may be a head fake signal more than a genuine inflection point.

Dramatic Improvements In Global Country Default Risks (CDS)

The following is an updated table of country default risk courtesy of Bespoke Invest
According to Bespoke Invest, (all bold highlights mine)

``The CDS prices represent the cost per year to insure $10,000 of debt for 5 years. The US CDS price is quoted in Euros. The list is sorted by year-to-date change, and as shown, default risk in Russia and Australia is down the most in 2009 at -77%. US default risk is down 68.1%, which is the most of any G-7 country. Japan is the only country that has seen default risk actually rise in 2009, but it also had the lowest CDS price of any country at the start of the year. Overall, while CDS prices are down sharply in 2009, they remain well above where they were at the start of 2008, so there's still plenty of recovery work to do."

Additional comments:

Falling cost of insurance on global sovereign debt papers seems consistent with today's general climate where there has been a significant reduction in risk aversion, mainly due to massive and concerted liquidity injections.

This fires up the self reinforcing collateral-lending feedback loop mechanism where rising collateral values prompts for more lending, and more lending increases collateral values.

This seem to also filter into sovereign instruments too. For example, the Philippines has taken advantage of today's yield searching landscape to book its third dollar denominated debt this year. This comes amidst record bond issuance in parts of the globe.

While this paints an impression of stability, stability becomes future instability as the credit cycle expands on a pyramid structure, otherwise known as the Ponzi finance.

Bespoke rightly points out that most countries have seen their CDS levels STILL significantly higher when compared to the last column or the start of 2008, in spite of the general improvements.

This is a noteworthy reference point. Only Lebanon has seen its CDS rates today lower than the start of 2008.

Moreover the Philippines, startlingly, could be reckoned as the second best performer where its CDS levels are back to the start of 2008! Perhaps this could be one reason she has easily raised a third round of debt issuance this year.

Lastly Indonesia and Brazil are among the closest to recovering the start of the 2008 levels.

Again the marked improvements of credit risks could serve as a staging point for massive levered risk taking-ergo a new bubble.

Credit Default Risk Update: Bond Vigilantes Around the Corner

An updated list of credit default swap (CDS) prices and changes to default risk based on 38 countries courtesy of Bespoke Invest.

In general, sovereign default rates have been higher.

But the biggest the surge in default risks on a year to date basis have been in European countries, particularly in Ireland which jumped 58%, Belgium 53%, Spain 52% and Portugal 51%.

And the banking based financial turmoil has weighed heavily even on its major European economies as Germany, UK and France.

The regional pecking order of default concerns appears to be: Europe, Latin America and Asia.

Fortunately, the Philippines have so far had inconsequential changes.

Perhaps recent success of its latest bond offering which had been well received was reflected by such the seeming equanimity of CDS spreads (see see Philippines Secures Funding Requirements; Return Of The Bond Vigilantes?).

The following is the table of CDS prices…

In terms of CDS prices, according to Bespoke, ``As shown, Argentina and Venezuela have the highest default risk, followed by Iceland, Kazakhstan, Russia, and Egypt. While the UK and US have relatively low default risk compared to most other countries, their CDS prices are getting worrisomely high. At the start of 2008, it cost about $8 to insure $10,000 of UK and US debt. It now costs $135 to insure UK debt and $75 to insure US debt. Japan has the lowest default risk of all of the countries highlighted, followed by Germany and France.”

As far as we are concerned, the Bond vigilantes seem to be lurking around the corner.

CDS Market/Default Risk Ranking: Philippines Maintains 12th Place, Europe Dominates Monthly Laggards

Bespoke Investment gives us a colorful snapshot of the pecking order of the cost of insuring debts of various nations, as measured by changes in Credit Default Swaps.

Based on month to month changes, according to Bespoke, ``Ireland, Austria, Greece, and the UK have seen default risk rise the most over the last month. All have risen close to or more than 100%. US default risk has risen the 8th most at 68%.”

Among the 10 worst monthly performers, notice that except for the US which ranks 8^th, European countries have dominated the field.

While we may not have the sufficient explanation on why the markets have priced in serious jitters to many European sovereign debts, we suspect that this has been related to

1) credit risks concerns via banking exposures to the Balkan States, which had overheated and whose internal bubbles has imploded, and possibly combined with

2) the recent deleveraging which has heightened liquidity strains in economies with accentuated budget deficits as below courtesy of Danske …

We also understand that Europe’s economy has been more dependent on the banking sector than the capital markets relative to the US. And when the cardiac arrest engulfed the global banking industry last October, the region’s banks, which carried substantial toxic instruments, saw its lending flows to the real economy critically impaired.

Thus, credit driven economic slowdown plus accentuated budget deficits compounded with credit risk exposure to the Balkans may have raised the market’s concern over many of the European nation’s default risk.

National CDS Ranking according to prices.

More from Bespoke, ``Since then, default risk has risen for all but two of these countries (Lebanon and Argentina). Below we provide the current credit default swap prices for these countries, along with where they were trading one month ago and at the start of the year. As shown, Argentina, Venezuela, and Iceland have the highest default risk, with Russia not far behind. Germany, Japan, and France all have lower default risk than the US at the moment. It now costs $60 per year to insure against US default for the next five years. While this may not seem high, it was at $8 earlier in the year, and $36 one month ago.”

Nonetheless, the CDS market shows how exposures to toxic papers, credit bubbles or failed government policies have largely impacted national credit ratings.

Hence, to engage in the narrative generalization that emerging markets reflect a similar state to toxic waste papers that prompted this crisis is to engage in a fallacy of division.

What we should watch is how the markets will price US CDS, as the world's reserve currency, to reflect on the market's approval or disapproval of present policy actions. A continued march upward could signify strains in its privileged status.

Meanwhile, the Philippines maintained its 12^th ranking with minor changes relative to the rest, on a month to month basis. That should be a relief.