Here’s a sovereign CDS curio for you.
Which do you think would have the most liquid collective CDS — emerging markets or developed markets?
Here’s the answer, courtesy of Fitch Solutions:
Remember that, in general, the more liquid sovereign CDS is, the more it is showing signs of financial stress, possibly combined with a significant amount of outstanding national debt and/or changes in its capital structure. Relatively liquid CDS is also a hint that there is agreement within the market about present value, but disagreement about future value due to heightened uncertainty surrounding the country.
According to Fitch the liquidity scores of assets have historically traded between four at the most liquid end and 29 at the least liquid end.
As you can see from the chart then, there’s been a steady increase in the average liquidity of developed economies’ sovereign CDS throughout the crisis — to the extent that it’s now become almost as liquid as emerging market CDS. Meanwhile, EM liquidity has fallen from its September 2008 highs, and according to Fitch “now shows no sign of increasing again”.
What’s the deal?
Here’s what Fitch says:
In essence, the trend shows there is now almost as much uncertainty in the CDS market about the future outlook on developed economies as there is for emerging economies, due to developed economies’ increasing budget deficits and falling tax revenues.
Of the developed economies, Japan (unsurprisingly given recent worries over its fiscal position) has seen the biggest increase in CDS liquidity this year, moving from the 88th percentile to the 47th percentile of names with the most liquid CDS contracts — across all asset classes, apparently.
Shoganai ne.
Related links:
Jim Reid on the `significant wobble’ in the sovereign CDS market – The Long Room
Sovereign CDS: Oh the irony of it all – FT Alphaville
The mystery meaning of sovereign CDS – FT Alphaville
Sovereign CDS: It’s not (just) the economy, stupid – FT Alphaville