CDS at 16-month high on global concerns

Renewed fears of Greek default fuel risk aversion

The cost of insuring Dubai’s sovereign debt rose on Friday, with the emirate’s five-year mid-spread on credit default swaps (CDS) rising to 507.74, a 16-month high, as global risk-aversion rose on renewed fears of a Greek default and the possibility of a double-dip global recession.

According to data from CMAVision’s Sovereign Risk Monitor, Dubai’s five-year CDS dropped to below 325 basis points in June this year, less than half from last year’s peak of 655bp in February 2010. Since early last year, however, the Dubai CDS saw consistent declines and fell below the 500bp-mark in May 2010, and remained below it for five subsequent quarters before recently rising once again on global concerns.

Dubai has been chiselling away at its debt – something that the market acknowledged as the cost of insuring five-year Dubai debt against default plunged to below its pre-crisis levels in June, with the emirate even dropping out of the global top 10 default probables.

However, renewed risk-aversion among global investors has once again pushed the emirate’s debt among the top 10 highest default probabilities even as neighbouring Abu Dhabi finished the third quarter of 2011 as one of the top 10 safest sovereign debts in the world.

The UAE’s two sovereigns that have issued global debt therefore present somewhat of a predicament to global investors, with one among the riskiest sovereign and the other among the safest sovereigns in the world.

Dubai debt default came into global limelight after the DW standstill announcement, with the CDS rate fluctuating massively at every minor and major announcement by the company and other sovereign Dubai firms. While Dubai’s debt woes received massive media attention in the past, some of Euro Zone’s debt woes are now topmost among global investors’ minds, with more than 90 per cent of investors expecting Greece to default on its massive debt commitments.

Greece’s debt tops the world’s highest default probabilities at 5,139bp, followed by Portugal at No. 2 (1,131bp) even as Ireland (704bp), Hungary (559bp) and Italy (444bp) are all among riskiest sovereign debts.

Last week, Greece revealed that it is unlikely to meet its fiscal deficit targets for 2011 and 2012 even as aid inspectors said negotiations on the bailout among members of the euro zone, the International Monetary Fund and European Central Bank were continuing and that there was no final conclusion with any party.

Without the aid, Athens may run out of cash by mid-November, prompting a swift default that would drag the euro zone deeper into a debt crisis already shaking financial markets worldwide.

CDS are benchmarks for protecting debt against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement.

The swap contracts pay the buyer face value in exchange for the underlying securities if a borrower fails to meet its debt agreements. A basis point is 0.01 percentage point.

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