Credit Default Swaps’ Trussed Trade
Unlike other components in the booming fixed-income class, credit default swap activity was off 20 percent in annual terms in Q3 to $215 billion, according to EMTA’s survey. In sovereigns Brazil, Mexico and Turkey had $20-30 billion turnover, while state oil companies in Russia and Venezuela led that segment. In the period the EU naked short-selling ban became permanent, along with a narrow interpretation of the market-making exemption as counterparties and dealers scrambled to dump portfolios. The Markit regional index lost Bulgaria, Hungary, Lithuania, Poland and Romania accounting for 30 percent weight, but left in place Croatia which joins next year and Ukraine which seeks an association agreement. For the 27 members in total sovereign CDS volumes and spreads dropped coincidentally since the summer with the ECB’s bond-purchase declaration and indications Greece would not exit the single-currency. The emerging market constituent premium came in 100 basis points, despite scares relating to Hungary’s negotiations for an IMF facility and Romania’s adherence to an existing one. Both are near recession and have drawn criticism from Brussels for anti-democratic practices.
Budapest’s fiscal deficit should stay within the 3 percent of GDP needed to maintain cohesion fund access, but banks will be subject to special tax continuation and a new transaction levy. Public debt is stuck around 80 percent of output with the central government’s assumption of municipal obligations and costly and inefficient health care system. Interest rates have been cut despite 5 percent inflation and another credit downgrade to BB brought condemnation of the rating agency as “speculators” in rhetoric designed to alienate foreign direct and portfolio investors. Romanian parliamentary elections in December will be held amid a truce between the ruling coalition and president Basecu in their power struggle, but the winning parties must prepare for expiration of the EU-IMF accord next March. International banks have reduced lines and privatization attempts stumbled after early momentum as the weak currency drifts toward 5 to the euro.
Poland had been Central Europe’s growth champion, but the current GDP advance is less than 2 percent as monetary loosening begins there too. A post-Euro football cup hangover has claimed several construction firms, and a pyramid scandal in the non-bank sector implicated the prime minister’s family. A privately-owned bank IPO has brightened equities enjoying a double-digit gain, as global bond issues command record low spreads with the aid of a $20 billion IMF contingency line. Croatia has turned in negative MSCI results as it heads for EU entry in July 2013 with resolution near on a longstanding dispute with Slovenia over post-Yugoslavia claims from ailing lender NLB. Tourism tax decreases should boost inflows to help balance the current account deficit, and gross external debt above 100 percent of GDP warrants a negative sovereign outlook as the budget tries to swap its previous overspending fate.
