3 - Accelerating Progress | S&P Global

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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 28th June 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 as 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

Greece re-enters the report as CDS pricing becomes available following an absence of nearly a year

Note: CPD is a function of the recovery level which varies according to several factors and distance to default, e.g. emerging markets assume 25%.

Q2 2013 was an eventful and volatile quarter with civil unrest in Brazil and Turkey, continued unrest

in Egypt and political tensions in Portugal. However, these events were eclipsed by the news that the

anticipated prospect of tapering (a reduction in the monthly bond buying program), announced by

the US Fed on May 22nd, could become a reality. The news prompted the start of a near doubling of

interest rates and precipitated a selloff in High Yield and Latin America/Asian Emerging market

Bonds and Stocks and a widening of CDS levels.

Argentina remains the most risky sovereign globally despite it tightening 23% over the

quarter.

Venezuela slips one place to be the 3rd most risky.

Portugal’s spreads managed to finish the quarter 4% tighter, even though the coalition

government was on the verge of collapse as recession, high unemployment and a widening

budget deficit, prompted the finance minister to resign. Spreads however, have continued to

widen in Q3.

Greece Credit Default Swaps start trading again, closing the quarter at 18.7%+100 running

and 3.5% Bid/Ask Spread, as it tries to secure a deal to lay off state workers (‘Troika’).

Note: Data for Greece from 17th May.

No change in the top three least risky sovereign credits which all end the quarter at 2-3bps

tighter.

The US climbs up a position as spreads tighten to 27bps from 37bps - the best performer in

the quarter.

The UK and Czech Republic enter the top 10 as CDS spreads in Australia and NZ widen above

50bps, losing them their positions in the top 10 least risky table.

The cost of protection in the US tightened 27bps as unemployment drops to 7.6%, ever

closer to the FED target of 7%.

CDS Spreads in Argentina traded in a band of 2000bps as a prospect of a default continues

and the second largest country in the region files a petition with the US Supreme court.

Hungary tightens to 317bps, escaping the volatile widening of spreads in Emerging market

economies.

CDS levels in China widen to 118bps as the growth rate slows and approaches 7.5%, topping

the largest percentage widener table.

Latin America suffered its worst quarterly performance for some time, as rising interest rates

and a slowing of growth in China sees a remarkable sell off in the region.

Spreads in Peru touched 175bps before settling back to 144bps at quarter end, with 10bps

due to the roll from the June to Sep 5Y contract.

US CDS spreads tightened considerably, and US fiscal policy seems to be working, as the

world’s largest economy enjoys an improving employment rate, higher stock prices and a

general bullish outlook from top CEOs. This prompted the U.S. Fed to review its $85bn

monthly buyback program and to consider to taper i.e. gradually reduce the repurchase

program over time. This started a selloff of US bonds, wider swap rates (almost doubling),

lower stock prices and a general selloff in emerging market debt, mainly in Latin America,

Africa and Asia, excluding Japan.

CDS spreads in the UK remained fairly stable over Q2, closing the quarter at 50bps as it

braces itself for a new Governor of the Bank of England, Canadian born Mark Carney.

Western Europe tightened 10% overall in the quarter, as positive economic data in Italy and

Spain saw spreads tighten in these two important economies in Europe.

The Portuguese government tenure could be cut short as worsening economic data prompt

calls for an early election. CDS Spreads end the quarter at 392bps.

Spreads in Switzerland tighten to 30bps as liquidity continues to improve in CDS.

Spreads in Ukraine and Russia widen 37% and 20% respectively. Russia/Gazprom OAO Basis

peaks to 100bps towards the end of June.

Hungary and Romania buck the trend and tighten 18% and 14% respectively.

The Nordic region continues to be the safe haven place to be in terms of CDS, as spreads

tightened 11% overall in the region.

Iceland spreads remain virtually unchanged, settling around 160bps.

CDS Spreads in the region widened 18% as emerging markets assets sell off in the quarter.

Iraq bucks the trend remaining unchanged on the quarter as International banks start to

expand into the region and the country boosts oil exports and rebuilds its economy.

CDS Spreads in Turkey peak at 240bps as anti-government protests in Taksim square

gathered momentum in June.

Morsi’s tenure as the leader of Egypt came to an abrupt end following civil unrest and a

military leadership once again takes control. Bid/Ask spreads widen 50bps and the cost of

protection widens to 900bps.

Israel remains stable widening only 2bps on the quarter as the economy remains strong

driven by hi-technology and chemical industries.

Note: Banque Centrale de Tunisie is used as proxy.

CDS Spreads in Asia, excluding Japan, widen 23% as China growth slows prompting concern

over the growth of other Asian emerging countries.

India, Indonesia, Malaysia and Kazakhstan see the cost of debt protection widen over 25%.

Japan remains stable at 77bps in a volatile quarter for the currency and the stock market but

not the CDS market.

Note: State Bank of India is used as a proxy.

CDS Spreads in Australia and New Zealand spiked mid-June touching 70bps.

The prospects of slower growth in Australia prompted the Reserve Bank of Australia to keep

rates lower, weakening the Australian Dollar FX rates, resulting in CDS Spreads pulling back

to the Mid-50’s.

Central & South America, excluding Argentina, widened a dramatic 45% on average in what

must have been a painful quarter for investors in the region.

Following a near decade of growth and prosperity the government of Brazil, led by Dilma

Rousseff, faced its toughest test for some time as more than a million people participated in

protests. CDS Spreads approach 200bps a support level seen three times before since 2004.

(See chart on next page).

We can look at the month of June in two stages when reviewing the daily spread performance of the

S&P/ISDA 100 CDS OTR Index throughout the month. Credit spreads remained within a range

through the first half of the month, widening slightly until the 12th, at which point the index

tightened for three days. The tightening was in response to economic numbers that pointed to

inflation remaining low and the economy being stable. The University of Michigan Consumer

Confidence came in lower (82.7) compared to the surveyed number (84.5), and month-over-month

CPI was also lower than expected at 0.1%.

The second stage of June began on the 19th with the press announcement following the FOMC

meeting. Fed Chairman Bernanke’s speech about the stronger economic improvement to come and

questions about the timeline for pulling back on economic stimulus led to dramatic selling in fixed

income and equity markets. The S&P/ISDA U.S. 150 Credit Spread Index widened from 69bps to

71bps on the day of the FOMC announcement followed by continued widening on the 20th (80bps).

This index reached a peak spread of 85bps on the 24th, but since then has tightened slightly as the

market has returned to behaving in a more orderly fashion. The question is how long does the new

normal last? U.S. unemployment numbers are due out on July 5th. Whether this will be a volatile

summer is yet to be seen. The Fed’s pending actions and events in markets such as Europe or China

could make the next few months interesting.

Exhibit 1: Spread History for the S&P/ISDA U.S. 150 Credit Spread Index versus the S&P 500 Price Return

Source: S&P Dow Jones Indices LLC and/or its affiliates, Data as of June 30, 2013. Index performance is based on spread

movement. Charts and graphs are provided for illustrative purposes. Past performance is no guarantee of future results.

1400

1450

1500

1550

1600

1650

1700

30

40

50

60

70

80

90

100

31/12/2012 31/01/2013 28/02/2013 31/03/2013 30/04/2013 31/05/2013

S&P/ISDA U.S. 150 Credit Spread Index (bps) S&P 500 (Price Return)

All rating sector indices were wider in June. The largest mover was the lower-credit S&P/ISDA CDS

U.S. High Yield B and Below Index whose spread change of 36 bps widened the index level for the

month from 363bps to 399bps. The S&P/ISDA CDS U.S. High Yield BB Index followed suit, but

widened by just 28bps. At a spread of 358 YTD, the overall S&P/ISDA CDS U.S. High Yield Index is still

79bps tighter than the 437bps level at which it began the year.

Investment-grade CDS, as measured by the S&P/ISDA CDS U.S. Investment Grade Index, widened

on the month (+7.5bps), but is tame in comparison to high-yield CDS. Year-to-date, spreads on the

three indices (Investment Grade, Investment Grade A & Above and Investment Grade BBB) are all

about 20bps tighter than they were at the beginning of the year.

All industry sector indices were also wider in June, with only the S&P/ISDA CDS U.S. Healthcare

Select 10 Index’s spread widening remaining below double digits at 6.8bps. The S&P/ISDA CDS U.S.

Homebuilders Select 10 Index widened the most (32bps) closely followed by the S&P/ISDA CDS U.S.

Energy Select 10 Index, which widened 30bps.

The S&P/ISDA CDS U.S. Financials Select 10 and S&P/ISDA CDS European Banks Select 15

experienced roughly the same degree of widening as the two indices’ spreads moved by 22 and

20bps respectively. The S&P/ISDA CDS U.S. Financials Select 10’s spread is still 10bps tighter than its

spread of 116bps at the beginning of the year. However, the S&P/ISDA CDS European Banks Select

15’s spread is now 35bps wider on the year at 208bps compared to its 173 spread at the beginning

of the year.

Exhibit 3: S&P/ISDA CDS U.S. Sector Historical Spreads

Source: S&P Dow Jones Indices. Data as of June 30, 2013. Charts are provided for illust rative purposes. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more

information regarding the inherent limitations associated with back-tested performance.

0

50

100

150

200

250

300

Weighted

Av g Spread

Home Builders Consumer Discretionary Consumer Staples

Energy Healthcare Financials

Exhibit 4: Daily Equalized Sector Spread Performance

Source: S&P Dow Jones Indices. Data as of June 30, 2013. Charts are provided for illustrative purposes. This chart may

reflect hypothetical historical performance. Please see the Performance Disclosure at the end o f this document for more

information regarding the inherent limitations associated with back-tested performance.

Exhibit 5: Homebuilders Performance Comparison

Source: S&P Dow Jones Indices. Data as of June 30, 2013. Charts are provided for illustrat ive purposes. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

90

95

100

105

110

115

120

125

130

135

140

Weighted

Av g. Spread

HomeBuilders

ConsumerDiscretionary

ConsumerStaples

Energy

Healthcare

Financials

0

500

1,000

1,500

2,000

2,500

3,000

3,500

4,000

140

160

180

200

220

240

260

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

S&P/ISDA CDS U.S. Homebuilders Select 10 Index (bps)

S&P Homebuilders Select Industry Index (TR)

The average spread

widening between the

19th and the 20th was 18

bps. Spread movement

ranged from

Homebuilders’ +31bps to

Healthcare’s +8bps.

Once the dust settled,

spreads improved going

into the end of the

month.

The S&P/ISDA CDS U.S.

Homebuilders Select 10

Index started the month

with a spread of 172bps and

continued to widen,

reaching a peak of 232bps

before ending the month at

204bps.

The S&P Homebuilders

Select Industry Index’s total

return was -4.59% for

the month.

Exhibit 6: Performance of the CDS Financial Sector Indices

Source: S&P Dow Jones Indices. Data as of June 30, 2013. Charts are provided for illustrative purposes. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for more information regarding the inherent limitations associated with back-tested performance.

With all the movement in the U.S. CDS markets, the widening of the S&P/ISDA Eurozone Developed

Nation Sovereign CDS and S&P/ISDA International Developed Nation Sovereign CDS indices’

spreads by 11bps and 7bps seems tame. Year-to-date, both these indices’ spreads are tighter,

though not by much.

Exhibit 7: Spread Comparison of Eurozone and International Developed Nation Sovereign CDS

Indices

Source: S&P Dow Jones Indices. Data as of June 30, 2013. Charts are provided for illustrative purposes. This chart may reflect hypothetical historical performance. Please see the Performance Disclosure at the end of this document for mo re information regarding the inherent limitations associated with back-tested performance.

0

50

100

150

200

250

300

350

400

60

80

100

120

140

160

180

200

220

6/29 7/29 8/29 9/29 10/2911/2912/29 1/29 2/28 3/31 4/30 5/31

S&P/ISDA U.S. Financial 30 Credit Spread (bps)

S&P/ISDA CDS Financials Select 10 (bps)

S&P/ISDA CDS Euro Banks Select 15 (bps-right scale)

50

100

150

200

250

300

Jun Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr May

Spread

(bps)

S&P/ISDA Eurozone Developed Nation Sovereign CDS Index(SPCDKR50)

S&P/ISDA International Developed Nation Sovereign CDS Index(SPCDMR50)

The S&P/ISDA U.S. Financial 30

Credit Spread widened by 12 bps

while the S&P/ISDA CDS Financials

Select 10 widened by 22bps in

June.

S&P/ISDA CDS European Banks

Select 15 widened by 21bps after

the FOMC meeting (June 20th). A

week later, the index recovered so

that month-to-date the S&P/ISDA

CDS Euro Banks Select 15 was

20bps wider, which was in line with

the widening of the S&P/ISDA CDS

Financials Select 10.

The S&P/ISDA Eurozone

Developed Nation Sovereign

CDS Index widened by 11 bps

while the S&P/ISDA

International Developed

Nation Sovereign CDS Index,

which contains a broader

selection of countries, widened

by 7bps.

Exhibit 2: S&P/ISDA CDS Index Data as June 30, 2013

Credit Spread CDS Indices Ticker

Weighted Average Market Spread as

of

Spread Change

(%)

Month-End

Prev

Month-

End

Prev

Qtr-

End

Prev

Yr-

End

MTD QTD YTD

S&P/ISDA 100 CDS SPCDXR50 55 48 57 63 14.5 -3.4 -

11.9

S&P/ISDA U.S. 150 Credit Spread SPCD5R50 79 69 82 92 15.0 -3.3 -

14.0

S&P/ISDA U.S. Corporate 120

Credit Spread SPCD2R50 73 62 76 83 16.2 -4.7

-

13.0

S&P/ISDA U.S. Financial 30 Credit Spread

SPCD3R50 107 96 108 129 12.0 -0.5 -

16.5

Rating Sector CDS Indices Ticker

Weighted Average Market Spread as

of

Spread Change

(%)

Month-

End

Prev

Month-

End

Prev

Qtr-

End

Prev

Yr-

End

MTD QTD YTD

S&P/ISDA CDS U.S. Inv estment

Grade SPCDZR50 81 74 91 100 10.2 -10.8

-

18.8

S&P/ISDA CDS U.S. Inv estment

Grade A and Abov e SPCDCR50 46 41 50 66 12.6 -9.0

-

30.4

S&P/ISDA CDS U.S. Inv estment Grade BBB

SPCDAR50 93 84 104 113 9.9 -11.1 -

17.5

S&P/ISDA CDS U.S. High Yield SPCDYR50 358 325 375 437 10.1 -4.4 -

18.1

S&P/ISDA CDS U.S. High Yield BB SPCDBR50 281 254 288 314 10.9 -2.4 -

10.3

S&P/ISDA CDS U.S. High Yield B and Below

SPCDWR50 399 363 421 501 9.8 -5.2 -

20.4

Industry Sector CDS Indices Ticker

Weighted Average Market Spread as

of

Spread Change

(%)

Month-

End

Prev

Month-

End

Prev

Qtr-

End

Prev

Yr-

End

MTD QTD YTD

S&P/ISDA CDS U.S. Homebuilders Select 10

SPCDVR50 204 172 185 200 18.6 10.6 2.1

S&P/ISDA CDS U.S. Consumer Discretionary Select 20

SPCDUR50 204 188 225 247 8.5 -9.3 -

17.5

S&P/ISDA CDS U.S. Consumer

Staples Select 10 SPCDRR50 119 109 136 156 9.7 -12.2

-

23.4

S&P/ISDA CDS U.S. Energy Select 10

SPCDQR50 196 166 191 216 18.3 2.5 -9.3

S&P/ISDA CDS U.S. Healthcare

Select 10 SPCDPR50 61 54 65 67 12.6 -7.0

-

10.1

S&P/ISDA CDS U.S. Financials

Select 10 SPCDFR50 106 84 101 116 26.3 5.1 -8.2

S&P/ISDA CDS European Banks Select 15

SPCDGR50 208 188 226 173 10.7 -8.0 20.3

Sovereign CDS Indices Ticker

Weighted Average Market Spread as

of

Spread Change

(%)

Month-End

Prev

Month-

End

Prev

Qtr-

End

Prev

Yr-

End

MTD QTD YTD

S&P/ISDA Eurozone Dev eloped

Nation Sov ereign CDS SPCDKR50 131 120 145 135 9.3 -9.4 -3.1

S&P/ISDA International Dev eloped Nation Sov ereign CDS

SPCDMR50 97 90 104 108 7.6 -7.3 -

10.8

Source: S&P Dow Jones Indices LLC and/or its aff iliates. Data as of June 30, 2013. Index performance is based

on spread movement. Charts and graphs are provided for illustrative purposes. Past performance is no

guarantee of future results.

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