Credit default swap spreads unchanged after S&P view

Despite the negative rating outlook by global rating agency Standard and Poor’s on Wednesday there was little change in the risk perception of global investors.

A critical risk measurement matrix is the credit default swap premium. Credit default swap (CDS) are insurance products that institutional investors take against default or delinquency by bond issuers. The CDS swap spread is presently 326 basis points or $326000 for a $10 million dollar risk cover. In October 2011, after the Moody's downgrade of SBI from Baa2 to Baa3, the swap spread was 363 basis points or $363000. Traders said that the narrowing of spreads indicated that the S&P rating outlook had made little impact on global financial institutions. This was because the outlook had already been factored into the pricing. However, the spreads were still higher than what it was in August 2011, when it was just 152 basis points.

The SBI CDS is a closely watched matrix, since it is treated as an indicator of sovereign risk. This is because, unlike most countries, India's has seldom resorted to sovereign borrowings directly from the international financial markets. Instead most sovereign borrowings are from multilateral institutions or entirely from the domestic markets.

Canara bank's chief economist Manoranjan Sharma said, “So long as there is no foreign borrowing investor risk perception is unlikely to be impacted by rating agency comments.” But he added, “There is no reason for any consternation. But fiscal deficit and investment are still a matter of concern in the country.”

Dun & Bradstreet senior economist Arun Singh said, “Investor perception has not been dented, because the economic fundamentals, especially the savings to GDP and the investment to GDP ratios are still strong in India.” The savings to GDP ratio in India is presently about 32 per cent and the investment to GDP ratio is close to 35 per cent. In rating perception, financial parameters have a high weightage. As a result, he added, “It is an accepted fact that there is concern on the high fiscal deficit, though the long term story remains intact.”

In the case of Spain, that is better rated than India presently at "A" by S&P, the CDS spreads are 489 basis points or a full 163 basis points higher than India, a clear indicator of the divergence in investor and rating agency perceptions.

In all these countries investor worries were largely driven by high debt to GDP ratios said Sharma. Debt to GDP ratio in India is presently about 60 per cent. In countries like, the ratios are over 100 per cent. It is this number that has had investors worries as reflected by the CDS spreads.

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