Which country saw the biggest rise in its sovereign CDS liquidity last week?
The UK naturally.
Great Britain’s sovereign CDS liquidity score, jumped six percentile rankings to 9.8, according to Fitch Solutions, as Alistair Darling presented his pre-Budget report.
As a reminder, the lower the liquidity score, the more liquid the CDS is. The more liquid the CDS, the more it is showing signs of financial stress, possibly combined with a significant amount of sovereign national debt, or just general uncertainty in the market about about future value.
Here’s a bit more detail, from Fitch:
In the second week of December, the UK showed the biggest hike in liquidity of any developed market sovereign, jumping six percentile rankings to a score of 9.8. This significant jump was driven by the UK Chancellor of the Exchequer’s pre‐budget report which lacked the detail on budget cuts and fiscal tightening that the market was anticipating, hence the increase in uncertainty which drove the increase in liquidity. The speech itself had limited impact on sentiment towards the UK in the CDS market with the five‐year CDS closing at 76bp on Friday 11 December, only slightly wider than what it had been trading at earlier in the week (72bp). However, this spread level is over three times wider than other ‘AAA’ sovereigns, such as France and Germany, which were trading at 22bp and 20bp respectively. Indeed, the CDS of the UK is in a similar trading pattern to Spain, and their spread levels are trading on par with ‘AA’ sovereigns.
In fact, if you look at previous values for Fitch’s CDS market-implied ratings model, it looks like UK CDS is almost into the AA- bracket, very much below its current official Fitch rating of AAA.
Incidentally, Portugal and Austria were the other big increases in sovereign CDS liquidity last week. Portugal’s CDS liquidity score increased to 7.33 and Austria to 7.15. That puts Austria firmly in the AA- bracket of implied ratings, also well below its Fitch rating of AAA.
Oh dear and Oh je.
Related links:
How to share losses: the dismal choice facing Britain – FT
Sovereign CDS liquidity snaps – FT Alphaville
Oh the sovereign liquidity! – FT Alphaville