The Dubai World announcement of an accord with its creditors has restored global investor confidence in the UAE’s debt-servicing capability, with credit default swaps (CDS), the cost to insure sovereign debt default, for Dubai and Abu Dhabi tightening over the pat couple of days.
While Dubai CDS, which peaked around 652 basis points in mid-February this year are down to 445bp as of this morning, Abu Dhabi CDS are down to 112bp, half-a-percent lower than yesterday, according to CMA DataVision’s Sovereign Risk Monitor.
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.
Despite the recent steady decline in the Dubai CDS rate, analysts believe that the rate remains unfairly high in comparison with some of the other global sovereigns.
The 99 per cent take-up of DW’s debt restructuring proposal has generally cheered the markets, with bullish investors in the country’s stock markets yesterday pushing up share prices to three-month highs on the Dubai Financial Market.
Global analysts including Moody’s Ratings Services too have given a thumbs-up to the deal, citing it as a positive for the local banking community.