Risk perception for most of the world’s countries have improved in the past year, according to a Standard Chartered analysis of credit default swaps (CDS), contrasting with deterioration in France, Italy, the United States and Germany. CDS are derivatives used by investors to hedge against a default or restructuring of debt. The higher the risk of default, the higher the CDS spread. StanChart said in a report on Tuesday that the CDS spreads of 35 countries showed Venezuela, Greece and Ukraine are still perceived as the sovereigns most at risk of default, with Venezuela trading with spreads of more than 3,000 basis points.
But 31 of the countries, including the above, saw spreads tighten since March 2016, it said, attributing the gains to oil’s price rise and improving economic growth across the developing world. “The main message – of an improving global picture – is in line with our own global GDP forecast: we see real GDP growth edging up markedly by 0.5 percentage point to 3.6 percent in 2017 … This would be the strongest acceleration of global output since 2010,” the bank told clients.
But it said a packed election calendar had driven a sharp rise in French and Italian CDS, with the former having widened as much as 65 percent on fears that the right-wing Marine le Pen could win presidential elections held in April-May 2017. That possibility was done away last weekend as centrist Emmanuel Macron scored a decisive second-round win over Le Pen. French CDS have since fallen to around 30 bps, according to IHS Markit, after surging above 60 bps in February.
CDS for Italy, which goes to the polls early next year with a plethora of eurosceptic parties in the running, rose by 42 percent in the past year, according to StanChart. U.S. CDS meanwhile widened by 13 percent over a year marked by the election of Donald Trump as President on a anti-globalisation, anti-immigration platform. German CDS widened five percent, which StanChart attributed to “perceived contagion effects for the country, reflecting its role as the engine of the euro area”.