Welcome to the Q4 2013 issue of S&P Capital IQ’s Global ... · Capital IQ CDS (formerly CMA...

Welcome to the Q4 2013 issue of S&P Capital IQ’s Global Sovereign Debt Credit Risk Report, A Market Driven

Perspective.

This report, produced with the unique credit information needs of investment managers, risk officers and

Government affiliated institutions in mind, focuses on the implied risk profile – the Credit Default Swap (CDS)

market’s current perception - of sovereign debt issuers in our global database of 76 countries over the previous

three months.

Divided into six sections, the report provides S&P Capital IQ’s proprietary market implied risk rankings together

with commentary identifying key trends and potential drivers of changes in perceived risk. The data are designed

to be used to augment users’ in-house efforts to recognise and understand early indicators of changes in

sovereign risk profiles. We believe this information, when used alongside other quantitative metrics and

qualitative information can be particularly useful in arriving at clearer, longer-term risk assessments. .

The report is broken into six parts, with the first two sections directed at the ten sovereign debt issuers that

demonstrate the highest and lowest market implied risk as of 31st December 2013, respectively. Sections three

and four highlight the five issuers whose CDS spreads tightened and widened the most over Q4 2013.

In the last two sections, readers will find trends in sovereign issuers’ CDS spreads from a regional perspective and

regional comparisons, as well as the market implied risk of global sovereign debt issuers based on their five year

Cumulative Probability of Default (CPD) and five year CDS mid-price as of 31st December 2013. These final parts

of the report look specifically at eight regions: the United States & United Kingdom, Western Europe, Emerging

Europe, Scandinavia & the Nordic Region, the Middle East & Africa, Asia, Australia & New Zealand, and Central &

South America.

Our report defines market implied risk as the five year cumulative probability of default, calculated using CDS

prices compiled by S&P Capital IQ, market assumptions on recovery levels, and an industry standard CDS pricing

model. The report and data are collated completely independently of Standard & Poor’s Ratings Services and any

other qualitative inputs.

This paper focuses on changes in the risk profile of sovereign debt issuers, with the intention to identify key trends and drivers of change. We have divided world debt risk into eight regions: US & UK, Western Europe, Emerging Europe, Scandinavia & Nordic Region, Middle East & Africa, Asia, Australia & New Zealand and Central & South America. In addition to identifying themes within each of these regions, macro trends across the sovereign debt sector are also discussed.

All Credit Default Swap (CDS) values contained in the tables and graphs within this document are calculated by S&P Capital IQ CDS (formerly CMA Datavision), which provides independent CDS prices intraday and end-of-day based on data collected from S&P Capital IQ’s consortium of CDS buy-side firms. S&P Capital IQ CDS specialises in consensus-based pricing for over-the-counter credit instruments, including CDS (single name, indices, tranches and quantos), Bonds and ABS.

All spreads shown are five year mid PAR spreads, which is not the normal convention that is quoted in the market. CDS quoting conventions vary according to market conditions and conventions, and Par spreads are used as they can be computed consistently across all credits allowing for cross comparison.

Where CDS data for the Sovereign is not available a majority state owned national bank “Proxy” is used to derive

CDS and consequently the CPD of the country. This is the case for India, for which data for the “State Bank of

India” is used, and for Tunisia, for which the “Banque Centrale de Tunisie” is used.

Unless otherwise stated, data is as of the 31st December 2013 close. Record highs are determined by using closing values and do not factor in intraday highs.

quantifies the probability of a country being unable to honour its debt obligations over a given time period. For sovereign CDS, this typically includes the probability of a restructuring of debt. Unless otherwise stated, all values are for the five year CPD. CPD is calculated using an industry standard model and proprietary credit data from S&P Capital IQ CDS and is based on the price of the CDS and recovery assumption. Reference to ‘risky’ in this report is in terms of the CPD. The CPD number may also include an element of devaluation risk if the standard currency for Sovereign CDS is not the domicile currency.

S&P Capital IQ CDS provides independent, intraday pricing on approximately 1,450 single name CDS and CDS Indices. Widely used by traders, risk managers, treasurers and researchers in financial institutions across the world, CDS data is available directly from S&P Capital IQ CDS or via our strategic channel partners www.cmavision.com/partners/.

For more information about how S&P Capital IQ CDS can help you effectively monitor and manage your credit exposures please contact us at [email protected]

None

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http://www.cmavision.com/partners/

mailto:[email protected]

Based on the CDS market’s current perception of the issuers’ risk profile

Source: S&P Capital IQ CDS. For illustrative purposes only





Argentina 66.26% 1742.33

Venezuela 55.40% 1147.73

Cyprus 51.50% 820.92

Ukraine 43.71% 807.76

Pakistan 43.61% 791

Egypt 34.73% 603.4

Greece 34.15% 627.35

El Salvador 27.17% 438.73

Portugal 27.12% 344.25

Serbia 25.72% 410.5

Q4 2013 saw one of the most positive Credit Default Swap levels, on a quarterly basis, since the financial crisis. CDS spreads tightened 9.5% across all sovereign entities as stocks continued to rally in Q4 2013, with the S&P 500 up 29% for 2013. Spreads for most regions were tighter overall, with only Scandinavia – which has been a safe haven over the past three years - the only region remaining flat over the quarter.

Argentina remains the most risky sovereign based on market implied risk. The market is now looking to

help resolve the deadlock between the second largest country in the region and the bondholders who

want payments full.

Venezuela widened significantly in Q4 as spreads with 5 year CPD increasing by 23%.

Cyprus performed well this quarter, tightening by 20%, but this did not change the sovereign’s position in

the top 10 most risky table.

Ukraine ended a volatile quarter 28% tighter, improving its position in relation to the last quarter by two

positions.

Portuguese spreads tightened 29% but Portugal remains in the top 10 most risky table, one position lower

than in Q3 2013.

Serbia and El Salvador remain highly illiquid in CDS and enter the table for the first time, after entering

the report in Q3 2013.



Norway 1.26% 14.03 Sweden 1.57% 17.52

Finland 2.02% 22.51

Denmark 2.11% 23.51

Germany 2.27% 25.49

UK 2.36% 26.46

USA 2.40% 27.5

Switzerland 2.73% 30.6

Netherlands 3.27% 36.76 Japan 3.29% 40.31

Norway, Sweden and Finland remain the three least risky sovereigns in terms of 5 year CDS, a position

they have held throughout 2013.

Japan enters the top 10 least risky table as CDS spreads end the quarter 37% tighter.



Source: S&P Capital IQ CDS. For illustrative purposes only.

Japan 64.29 40.31 -37.30%

Italy 263.41 167.15 -36.54%

Slovenia 358.1 227.5 -36.47% Argentina 2608.03 1742.33 -33.19%

Spain 224.18 152.96 -31.77%

Japan spreads close the year at 40bps, a level not seen by the sovereign since the middle of 2009. (See

chart below). Japan five year CDS form a head and shoulders pattern since the beginning of the financial

crisis.

Italy and Spain, the top tighteners in Western Europe in Q4, enter the table for the top five tighteners

globally.



bps



Austria 30.04 37.37 24.40% Venezuela 933.92 1147.73 22.89%

Iceland 164.1 183.9 12.07% Turkey 217.16 242.18 11.52%

Brazil 174.97 192.16 9.82%

The latter part of Q4 saw spreads in Turkey reach an intra-day high of 259bps on the 27th December, as

protests against the Turkish government reaches the streets in violent clashes with the police.

Brazil ended the year at 192bps as civil unrest continues to unsettle the host nation of the 2014 FIFA

World Cup.



Five year CDS spreads in the UK and the US tightened 8bps over the quarter, as the UK unemployment

rate continues to fall, ending the year 7.4% closer to Bank of England interest rate re-examination.

The one to five year tenor US curve inverted as a government shutdown over the debt ceiling heightened

concerns of technical default (see 1Y/5Y Chart below).



Western Europe finished the year and the quarter 16% tighter overall, with Italy, Spain and Portugal CDS

markets mirroring the falling bond yields and perhaps indicating that confidence in these important

European countries is returning to debt investors. .

Ireland’s first bond auction since exiting the bailout program saw the nation raise 3.75 billion Euros – the

low borrowing costs see CDS spreads tighten further to close the quarter at 120bps.

CDS spreads in Greece and Cyprus tightened to 627bps and 821bps, respectively.

All CDS spreads in Western Europe are quoted in USD, so the default risk includes an element of FX

devaluation risk. S&P Capital IQ CDS can also provide data in the domicile currency (EUR) and the implied

devaluation risk.



Overall, spreads in Eastern Europe tightened 7% in Q4. Slovenia, whose spreads widened to 500pbs in August 2012 due to solvency concerns about its banking

system, was the best performer this quarter - its spreads tightening 36% to 228bps. CDS spread volatility in Ukraine spiked this quarter as political uncertainties and solvency issues

heightened concerns for debt investors, but support from Russia in the form a $15billion bond purchase programme and a lowering of oil prices saw CDS spreads tighten 28% to 808bps.



Spreads in the Scandinavian and Nordic region remained stable and flat overall in Q4 2013.

Iceland drifted wider during the quarter but managed to stay below 200bps.




The region tightened 6% overall, with Turkey the notable widener ending the year at 242bps.

South Africa ended the quarter at 204bps, 2.3% wider than Q3.

Israel was the region’s notable tightener, ending the quarter at 103bps, as a soaring NASDAQ and

technology industry continues to drive the country’s growth.

Iraq, which continues to remain very illiquid in CDS, drops below the 400bps level, ending the quarter in

the 350bps area.

CDS spreads in Egypt remained fairly stable following a volatile session in Q3 2013.



Overall, Asia ended 2013 12% tighter.

Japan spreads tightened to 40bps, as the Nikkei ended the year on a high following optimism that new

fiscal policies and weaker yen will deliver economic growth.

The Indian rupee stabilised in Q4 as the CDS spreads end the quarter at 275bps, 15% tighter.

The cost of debt protection in China ended the year at 80bps, as world’s largest country by population

continues to grow at above 7%.

South Korea and Malaysia were the notable tighteners, both ending the quarter 16% tighter.



In the first quarter that the Liberal government leader Tony Abbot was in power, saw CDS spreads in

Australia tighten 6bps.

New Zealand, whose spreads tracked those of Australia, ended the year at 41bps.



The region tightened 8.6% overall, with Brazil and Venezuela the only wideners.

The cost of debt protection in Brazil rose above 200bps this quarter but, as one of the few sovereign

wideners in the quarter, managed to end the quarter at 192bps,. Rising inflation and a depreciating

currency continue to concern investors.

Mexico was the best performer in the Americas in Q4 2013, ending the year at 92bps as it continues the

fight against drug trafficking and organised crime.



Argentina 66.26% 1742.33

Venezuela 55.40% 1147.73 Cyprus 51.50% 820.92 Puerto Rico 49.46% 668.97

Ukraine 43.71% 807.76 Pakistan 43.61% 791

Egypt 34.73% 603.4 Greece 34.15% 627.35

El Salvador 27.17% 438.73 Portugal 27.12% 344.25 Serbia 25.72% 410.5

Lebanon 25.15% 395 Tunisia 24.53% 392.5

India 24.50% 302.9 Sicily 22.59% 283.11 Iraq 22.21% 357.4

Croatia 22.16% 344.42 Vietnam 21.44% 260.72

Nigeria 20.40% 323.5 Indonesia 19.08% 228.99 Costa Rica 17.24% 261

Hungary 16.99% 257.25 Turkey 16.04% 242.18

Bahrain 15.84% 237.33 Guatemala 15.70% 237.07 Iceland 15.58% 183.9

Slovenia 15.23% 227.5 Dubai 15.16% 225.06

Algeria 14.49% 217.07 Italy 14.09% 167.15

Morocco 13.95% 208.61 South Africa 13.74% 203.59 Brazil 13.01% 192.16

Spain 12.96% 152.96 Romania 12.45% 182.3

Uruguay 12.29% 181.8 Kazakhstan 12.06% 176.7 Russia 11.24% 164.58

Thailand 11.03% 128.15 Ireland 10.32% 119.67

Philippines 9.88% 113.75 Malaysia 9.45% 109.19 Peru 9.10% 132.13

Bulgaria 8.68% 125

Lithuania 8.46% 121.5 Colombia 8.09% 116.65

Latvia 8.06% 115.4 Panama 7.69% 110.6 Israel 7.19% 102.55

China 7.04% 80.24 Mexico 6.40% 91.26

South Korea 5.83% 66.18 Slovakia 5.76% 81.7

Chile 5.60% 80.14 Poland 5.59% 79.3 France 4.76% 53.73

Estonia 4.51% 64 Czech Republic 4.37% 61.9

Qatar 4.22% 59.34 Belgium 4.20% 47.28 Hong Kong 4.19% 47.4

Abu Dhabi/Emirate of 3.94% 55.35 Saudi Arabia 3.91% 55.27

New Zealand 3.64% 40.98 Australia 3.50% 39.4 Austria 3.32% 37.37

Japan 3.29% 40.31 Netherlands 3.27% 36.76

Switzerland 2.73% 30.6 USA 2.40% 27.5 UK 2.36% 26.46

Germany 2.27% 25.49 Denmark 2.11% 23.51

Finland 2.02% 22.51 Sweden 1.57% 17.52

Norway 1.26% 14.03

S&P Capital IQ, a business l ine of McGraw Hill Financial, is a leading provider of multi-asset class data, research and analytics

to institutional investors, investment advisors, universities, consultants, and financial and quantitative analysts around the

world. We provide a broad suite of capabilities designed to help you track performance, broaden your research and support

your analysis and investment ideas. Through leading desktop solutions such as Capital IQ and Global Credit Portal, enterprise

solutions such as Compustat, S&P Securities Evaluations and Global Data Solutions, S&P Capital IQ sharpens financial

intelligence into the wisdom today’s investors need.

(Formerly CMA Datavision). Following the acquisition of CMA in 2012, S&P Capital IQ CDS offers independent pre & post-trade pricing, with deep

capabilities and broad asset class coverage for fixed income and OTC derivatives. To date S&P Capital IQ provides:

CDS – 1,500 intraday single name and index curves, plus 200 rating sector benchmark curves Corporates, Sovereigns and Loans - 275,000+ evaluated prices and pre and post trade prices Structured Finance and US Municipal Bonds – Over 3.2 Million daily evaluated prices

If you have questions or comments about this report, or wish to learn more about the products and services that S&P Capital IQ offers, please contact us:

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Welcome to the Q4 2013 issue of S&P Capital IQ’s Global ... · Capital IQ CDS (formerly CMA...

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