Rising CDS Levels for Dubai and Greece; Vietnam and China More Stable

Black Friday got a little darker for Dubai as the nation requested a six-month stand-still agreement on its debt. A year ago, when the world was not only staring into the abyss but appeared to have slipped off the edge and was falling into it, Nouriel Roubini was predicting all sorts of horrible outcomes at the time which included at least one sovereign debt holder failing if not two or three. To some extent it is a little surprising that it has taken this long for that prediction of his to come about.

The actual jolt seems somewhat less terrible than all of the headlines would have us believe however as Roy Ramos, an analyst with Goldman Sachs in Hong Kong said, “Our first stab at potential worst-case loss estimates suggests a manageable impact.” After some back of the envelope calculations, RR thinks the two banks with the biggest exposure, HSBC (HBC) and Standard Chartered Bank could take hits of $611MM and $177MM respectively. Not fun by any means but given the write-offs of the last year, these numbers seem more like rounding errors than anything with the potential to sink either institution.

With countries like Australia and Israel well into their recoveries and raising rates to moderate their rebound’s momentum, it is becoming a case of global haves and have nots as Greece, Italy, Ireland and Portugal are seeing the cost of default insurance on their debt rise.

Greece in particular has been getting a lot of attention lately as the yield on its debt as compared to that of Germany has increased significantly. The Greek government said its deficit will hit 12.7% of its national income this year which is the most for any country in the 16-nation euro-currency zone. Moody’s Investor Service has warned that both Greece and Portugal could see downgrades on their government debt in the future.

Interestingly there were a few other events of note late last week that didn’t get the same coverage but were equally if not more important. First was that Vietnam devalued its currency by 5% last Wednesday which was the third devaluation for the Dong since June 2008. The Vietnamese central bank simultaneously raised its interest rate by 1%. The motivation for the first was to make Vietnam’s manufactured goods cheaper than its Asian neighbors' goods while the rate rise was meant to battle speculative forces on the Dong.

China was also making a bit of history as it sold its first government bond with a 50 year maturity. Demand for the paper was strong as the 20BN Yuan bond ($2.93BN) sold at a yield of 4.3%, better than early estimates of needing a yield between 4.40%-4.50% to attract sufficient interest. The bid to cover ratio of 1.99 was also stronger than the 1.5 average for previous Chinese government bond auctions

The move was seen as part of the nation’s effort to make its government bond market a better pricing benchmark for corporate debt sales. Chinese pension funds and insurers were the primary buyers as they seek to better match assets with liabilities.

While there has been much discussion of excess liquidity in the Chinese economy evidenced by real estate prices in Hong Kong and the amount of gambling in Macau, the ruling Politburo of China’s Communist Party announced Friday that it would “maintain the continuity and stability of economic policies, and continue to implement the proactive fiscal policy and loose monetary policy.” So in a slight twist to Admiral Farragut’s phrase, it looks like it’s “damn the bubbles, full speed ahead.”

Dubai’s CDS closed at 317bps on 11/24 and 647bps on 11/27. The low of 288bps was hit on 10/20.

Greek sovereign default insurance bottomed on 8/4 at 100bps and while not moving as dramatically as Dubai’s CDS did last Thursday, it did reach 208bps that day. So while the move was more gradual, the result was actually a larger increase than that experienced by Dubai.

Vietnam’s CDS closed at 263bps on Friday which is where they spent most of August. September brought a move down to the mid-100s with the low of 166bps being reached on 10/16. The highs were touched last December 5th at 613bps.

China’s CDS have been trading sideways since about May of this year bound by 100bps on the upside and 58bps (9/23) on the downside. That closed towards the upper band on Friday at 92bps, possibly a result of the continuation of the government’s stimulative efforts.

Enjoy the week.

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