GRAPHIC-In CDS markets, all emerging economies are not equal

LONDON, Sept 4 Wed Sep 4, 2013 9:46am EDT

LONDON, Sept 4 (Reuters) - Default insurance costs for a "Fragile Five" of emerging economies have rocketed since early May, reflecting how investors are discriminating between countries reliant on foreign capital and their more robust peers.

In the four months since the U.S. Federal Reserve first hinted that its monetary stimulus may soon be reined in, five-year credit default swaps (CDS) for Brazil, Turkey and Indonesia have more than doubled, the following graphic shows:

For the other members of the Fragile Five, so dubbed by Morgan Stanley because of their big current account deficits, South African CDS are up more than 100 bps and the five-year CDS of the State Bank of India, commonly used as a proxy for the sovereign, are trading around 365 basis points, the widest in a year and up 150 bps since early-May.

This means it now costs $365,000 a year to insure exposure to $10 million of SBI debt over a five-year period

By contrast, five-year CDS have barely budged in Poland, Israel or South Korea - countries seen as less vulnerable to foreign capital flight from emerging markets.

Sovereign CDS levels are not available for Taiwan but the CDS of Cathay Financial, the country's biggest financial firm have barely moved, Markit data shows.

UBS analysts predict the problems of the "deficit" countries, dependent on inflows of foreign money to fund current account shortfalls, will deepen as U.S. Treasury yields rise.

"A higher global risk-free rate will mean a smaller pool of willing savings to finance their deficits. Markets here are likely to behave much worse than markets such as Korea, where current account balances are positive," they write.

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