Global Investing

Ireland descends from risky debt heights

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Good news for Europe as the cost for insuring sovereign debt against default fell in the third quarter of 2012, according to the CMA Global Sovereign Credit Risk report.

Ireland slipped out of the 10 most risky sovereigns for the first time since the first quarter of 2010 according to CMA, making space for Lebanon to enter the club of the world’s ten most risky sovereign debt issuers.

Although Irish 5-year credit default swap spreads tightened to 317 basis points from 554 basis points in the third quarter, there is still a 25 percent chance that Ireland will not be able to honour its debt or restructure it over the next five years.

If this sounds bad, it’s an improvement from last quarter’s 39 percent and stands up pretty well against Greece, which tops the table with a 90 to 99 percent chance of default or further restructuring.

It’s lonely high up for Greece on the Olympus of risky sovereigns – the list’s number 2, Cyprus, can only boast of a comparatively modest 57 percent chance of default or debt restructuring.

Norway held onto the top position as the world’s safest sovereign debt issuer, matching the general trend of Western Europe and Scandinavia in reporting the largest tightening over the third quarter. Denmark is a new entry to the top 10 of least risky sovereigns, pushing Japan and New Zealand up higher on CMA’s risk list.

10%-plus returns: only on emerging market debt

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It’s turning out to be a great year for emerging debt. Returns on sovereign dollar bonds have topped 10 percent already this year on the benchmark EMBI Global index, compiled by JP Morgan.  That’s better than any other fixed income or equity category, whether in emerging or developed markets. Total 2012 returns could be as much as 12 percent, JPM reckons.

Debt denominated in emerging currencies has done less well . Still, the main index for local debt, JPM’s GBI-EM index, has  racked up a very respectable 7.6 percent return year-to-date in dollar terms, rebounding from a fall to near zero at the start of June.  Take a look at the following graphic which shows EMBIG returns on top:

Fund flows to emerging fixed income have been robust. EPFR Global says the sector took in  $16.2 billion year to date.  JPM, which tracks a broader investor set including Japanese investment trusts, estimates the total at $43 billion, not far off its forecast of $50-60 billion for the whole of 2012.

from MacroScope:

Vultures swoop on Argentina

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Holdouts against a settlement of Argentina’s defaulted debt are opening a new front in their campaign for a juicy payout more than a decade after the biggest sovereign default on record.

Lobbyists for some of the investors who hold about $6 billion in Argentine debt are in London to persuade Britain to follow the lead of the United States, which last September decided to vote against new Inter American Development Bank and World Bank loans for Buenos Aires.

Washington believes Argentina, a member of the Group of 20, is not meeting its international obligations on a number of fronts. Apart from the dispute with private bond holders, Argentina has yet to agree with the Paris Club of official creditors on a rescheduling of about $9 billion of debt. It has refused to let the International Monetary Fund conduct a routine health check of the economy. And it has failed to comply with the judgments of a World Bank arbitration panel.

Trash heap for sovereign CDS?

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For all the ifs and buts about the latest euro rescue agreement, one of its most profound market legacies may be to sound the death knell for sovereign credit default swaps — at least those covering richer developed economies. In short, the agreement reached in Brussels last night outlined a haircut on Greek government bonds of some 50 percent as a way to keep the country’s debt mountain sustainable over time. But anyone who had bought default insurance on the debt in the form of CDS would not get compensated as long as the “restructuring” was voluntary, or so says a top lawyer for the International Swaps and Derivatives Association — the arbiter of CDS contracts.

ISDA general counsel  David Geen said there would be no change in the ruling to account for the size of the haircut:

As far we can see it’s still a voluntary arrangement and therefore we are in the same position as we were with the 21 percent when that was agreed (in July)

from Jeremy Gaunt:

The rule of three

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It is beginning to look like financial markets cannot handle more than three risks. First we have, as MacroScope reported earlier,  Barclays Wealth worrying about U.S. consumers, euro zone debt and Asian overheating.

Now comes Jim O'Neill and his economic team at Goldman Sachs, with three slightly different notions about risks in the second half, this time in the form of questions. To whit:

1) How deep will the U.S. economic slowdown be and what will  the policy response be? (That's two questions, actually, but let's not nitpick).