CDS market: Japan Ranks Highest In Credit Concerns

An updated ranking of Country Default Risk from Bespoke Invest...

According to Bespoke, ``As shown, Japan's default risk is up the most in 2009, although it remains on the low side when compared to other countries. The United States' default risk is up 41% year to date. All CDS prices, with the exception of the US, are priced in US dollars, while US CDS prices are quoted in Euros. Sovereign debt insurance makes you wonder, especially for the big countries that are probably "too big to fail."

It's kinda peculiar to see developed economies dominate the pecking order of concerns over the risks of credit default, led by Japan, Germany, France, UK and the US, while many EM economies appear as "less risky" (in terms of the growth clip of CDS prices and not based on nominal pricing)...and this includes the Philippines.

Another important point is that while everyone seems focused on the credit conditions of the US which has been splurging on government spending programs, it is Japan's credit ratings that have been taking a severe drubbing.

And this isn't merely reflected in the Credit Default Swap standings but likewise in the Japanese Yen (top window) and its equity benchmark, the Nikkei 225 (main chart).

The Yen rallied furiously at the onset of the unraveling of the global "deleveraging" process as many of the cross currency arbitrages or the "carry trade" had been reversed. However, as the deleveraging aged, it appears that concerns have now shifted over the country's credit worthiness.

Aside from being the largest debtor among developed economies, the horrid impact from a loss of global demand from the ongoing crisis recently collapsed its export oriented economy, which resulted to a reversal of its unbroken string of current account surplus trend since 1981. And this has also been compounded by the diminishing savings wrought by its aging society.

From the Economist

In addition, Japan has previously announced that it would be undertaking its own $250 billion of stimulus package and may conduct its version of "quantitative easing" by allocating $10 billion to purchase of corporate bonds maturing within the year and another $10 billion to acquire equity shares held by Japanese banks (Reuters). All these may have conspired to put investor concerns over Japan's credit eligibility.

Tom Dyson of Daily Wealth suggests that Japan may be in the path of bankruptcy ,``Of the major industrial economies in the world, Japan's government is the most indebted.

``Since its recession began 20 years ago, Japan has plowed trillions into its banking system via numerous bailout programs. Japan's mantra is growth without cost. As a result, the Japanese government has built up the world's most crippling debt load."

``The government of Japan owes $7.8 trillion. That's $157,000 per capita.

``We've been using government debt per capita to compare the government debts of Britain, the United States, and Japan. But government debt to GDP is the ratio economists use to compare the indebtedness of countries. The UK has a government debt-to-GDP ratio of 48%. The U.S. has a government debt-to-GDP ratio of 75%. Japan has a government debt-to-GDP ratio of 187%.

``If there's going to be a major sovereign bankruptcy, it's going to happen in Japan. Its economy is a shambles. For years, Japan has relied on exports... but even that's drying up now. In January, Japan's exports plunged 47%, producing a trade deficit. People talk about Japan as a "nation of savers." But that's not true anymore. Japan's personal savings rate has collapsed from 16% in the early 1990s to 2.2% last year."

With $15 trillion of estimated household assets, and less levered corporate and banking sector relative to its OECD peers, I doubt a Japan bankruptcy.