How did country risk fare in 2011? Bad, we all know that. But how bad?
We use one of the indicators that measures the "fever" of this risk, namely the level of the 5-year Credit Default Swap (CDS). In fact CDSs represent, for those who buy them, the cost of coverage against the risk of a name, which can be a bank, a company, a sovereign state. Whoever buys this particular derivative, in other words, pays a certain rate to cover himself against the possibility of insolvency of that name, on which he has previously assumed a risk (for example by buying a bond or a debt against him) . At least, this was the original function of the CDS: even if later (see an article on First that appeared a few months ago) international speculation has used the same tool to speculate against a particular name. Among the many indicators of this risk, the 5-year CDS on sovereign risks is one of the most used. We enclose a table kindly provided to us by Banco Popolare, and reported in its financial Newsletter.
What are the considerations that we can draw from this reading? We list the main ones:
1. Country risk has significantly worsened since the beginning of the year in all countries, including those that have always been considered among the strongest (Germany, USA, France). The deterioration was enormous in some cases (Greece +25,43%, Portugal +6,22%), notable in others (Argentina and Ukraine). With an increase in the cost of 5-year CDSs of 322 basis points (bps, i.e. 3,22%) since the beginning of the year, the cost of covering the Italy risk at this maturity has more than doubled, reaching the unpleasant level of 5,61 ,XNUMX%.
2. The area in which the more significant deterioration was theEurope, where, not counting the peaks in Greece and Portugal, the level of CDS on many countries increased by more than 1%. The area in which instead the worsening was less marked, except in the case of Argentina, was that of Americas. The best absolute figure is that of Norway (whose cost of 5-year CDS is just 46 bps), while the best relative figure is that of the USA (the cost of whose CDS has increased by only 0,11% since the beginning year).
3. Moving on to comparisons, some of them may seem strange, and deserve more careful consideration. For example, is it possible that hedging Germany risk costs more than the UK (103 versus 97 bps)? It can't be for a political factor: both countries are led by a conservative government. Nor for the assessment of the fundamentals of the economy. In the third quarter of 2011 both countries slowed considerably, but the macroeconomic data of Germany, as of September 2011, remain much better than those of Great Britain: GDP (+2,9% on an annual basis for Germany, +0,5% for UK); inflation (+2,9% against +5,2%); unemployment (6,9% against 8,3%); industrial production (+5,4% against -0,7%). So perhaps it depends on the fact that Germany belongs to the Eurozone and Great Britain does not, rather has remained isolated in the EU itself? This too seems strange, if it is true that everyone agrees that a possible implosion of the euro would involve many other countries, including the UK. Perhaps the only real reason is that CDS are quoted mainly on the London and New York markets.
Other comparisons: it is clear to all that Italy is suffering more than others from its bad economic accounts, but it is possible that its quotations are worse not only than those of Spain, but also of Bulgaria, and only slightly better than those of Hungary, which of all the countries of the New Europe is the worst off? And what about France, whose risk is judged to be higher than that of South Africa, Chile and Brazil, but also of Mexico, Colombia and Peru.
In conclusion, it now seems clear that international speculation is aiming at the big target: strike at the heart of the euro through a strategy of the spider, weaving a web on different markets in order to weaken the various countries to achieve a global result, destroy the European currency. It's hard to say whether he will succeed. It is easy to ask who benefits, and if it is not time that the famous control rules on some financial markets, such as that of the CDS, are applied worldwide and in a rigorous manner.
Attachments: Table of 5-year CDS on sovereign debt.pdf
