If anyone can offer a truly sensible rationale for the burgeoning market for sovereign CDS can they please let Euromoney know what on earth it is?
CDS have increasingly become a market reference point for gauging the creditworthiness of G10 countries in the past few months. As systemic fears were cleared up by the blanket provision of bank guarantees and injection of public debt so the CDS on those countries with large financial systems have widened. There is a certain logic to this. Seemingly it supports the view that there is no such thing as a free lunch – for sovereign states that is.
Let us consider what purpose buying protection on a G10 country can actually have. The most logical is that it is a mechanism for rates portfolio managers to manage their economic country risk exposure. While the market-to-market benefits might be apparent –...
