| LONDON, Sept 4
LONDON, Sept 4 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
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.