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.