Apophis
Apr23rd ’09 1:58 am

CDS-Spread as Rating

Posted by Apophis

, ,

25 Comments

Found a nice Blogentry which displays the current high CDS Spreads in the market. CDS stands for Credit Default Swap, its basically an insurance against the Default of a the issuer of a paper (i.e. the case the issuer doesn't pay back the debt). You can buy such insurance also for countries.

Since the new Banking Crisis theses CDS rates increased dramatically. Since its a kind of insurance you can calculate what the rates say about the risk of a debt not be payed back. However its not the real risk behind the country, it is the currently expected risk. Thats why they increased dramatically during the last months. The risk was expected to be too low before the crisis, and now they are expted defaults is probably too high, the real risk is probably somewhere in between.

Other factors can coun't into it aswell, the risk of the party which sells the insurances, if the market is big, so it is easy to trade CDS and so on.

However I found some very strange things.

The lowest Credit Default Swap Spread has Malta with 22 Base Points (which is 0.22%) However the Rating of the country is only an A rating while Austria has a CDS-Spread of 112 Base Point and has a Triple A rating. In Malta the Liquidity is low thats why they only get an A rating, however the Market thinks different about the Rating than the Rating Agencies.

If we would let the market decide the ratings would be accordingly (Linearly Interpolated AAA - CCC+ = 0% - 100% PD) :

 

Rang(von) Land Market Rating  
1 (2) Argentinien CCC+ 1
2 (1) Ukraine CCC+ 0
3 (5) Pakistan B- -1
4 (4) Irak B- -
5 (3) Venezuela B- 3
6 (6) Kasachstan BB- 3
7 (7) Island BB- 3
8 (8) Lettland BB 1
9 (9) Dubai BB -
10 (11) Libanon BB+ -5
11 (12) El Salvador BB+ 0
12 (10) Litauen BBB- 5
13 (13) Indonesien BBB- -3
14 (14) Bahrain BBB- 4
15 (16) Vietnam BBB -3
16 (19) Rumänien BBB 1
17 (18) Ungarn BBB 3
18 (15) Ägypten BBB -2
19 (17) Estland BBB+ 5
20 (21) Bulgarien BBB+ 2
21 (22) Panama BBB+ -3
22 (23) Kolumbien BBB+ -3
23 (20) Russland BBB+ -1
24 (24) Peru A- -3
25 (29) Brasilien A- -3
26 (25) Kroatien A- -2
27 (26) Philippinen A- -6
28 (31) Marokko A- -4
29 (30) Korea A- 1
30 (28) Türkei A- -6
31 (32) Tunesien A- -2
32 (33) Südafrika A- -1
33 (27) Abu Dhabi A 3
34 (34) Katar A 2
35 (37) Irland A 4
36 (35) Saudi Arabien A+ 1
37 (39) Thailand A+ -3
38 (38) Malaysia A+ -2
39 (36) Polen A+ 0
40 (40) Israel AA- -2
41 (41) Chile AA- -1
42 (42) Griechenland AA- -3
43 (44) China AA- -1
44 (43) Tschechien AA- 1
45 (46) Österreich AA 2
46 (45) Neuseeland AA 1
47 (48) Hongkong AA 1
48 (49) Italien AA -2
49 (51) Schweiz AA 2
50 (47) Australien AA 2
51 (52) Slowenien AA+ 1
52 (50) Slowakei AA+ 1
53 (53) Grossbritannien AA+ 1
54 (54) Japan AA+ -1
55 (55) Spanien AA+ 0
56 (56) Schweden AA+ 1
57 (57) Portugal AA+ -3
58 (59) Belgien AA+ 0
59 (58) Dänemark AA+ 1
60 (60) Niederlande AA+ 1
61 (61) USA AAA 0
62 (62) Frankreich AAA 0
63 (63) Finnland AAA 0
64 (64) Deutschland AAA 0
65 (65) Malta AAA -5

What we see is: Some countries on the bad end of the scale are unproportionally overrated by rating-agencies, acording to the market. Especially eastern countries from the EU are overrated, I am pretty certain that the EU has a bigger impact in the rating agencies than on the market.

On the other side, rating agencies distrust Portugal, Turkey, Phillipines, Indonesia, Thailand, Marocco, Columbia, Panama, Brasil, and Libanon (3 or more steps difference in ranking) much more than the market does (at the last transaction date)

As the first comment points out, Malta's data is completly outdated. Because CDS are so rare with malta, the last transaction was way before the Financial Crisis. Other small countries will also have small numbers and won't have correct numbers, countries with a very high CDS are also difficult to get correct data since the gamblers won't have an insurance. And giving money to countries with a CDS of over 2000BP is defintily like playing Roulette.

Who is right? The market - or the rating agencies?

Maybe we will see that !

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