May 2009
CDS: Brazil undeservedly outshines Mexico
Do CDS spreads for Brazil and Mexico adequately reflect their relative economic health?
Since the onset of the credit crisis several events have highlighted just how little a rating reflects market reality. Brazil’s and Mexico’s credit default swap spreads are a case in point. Since January, Mexico’s five-year CDS have been trading wider than Brazil’s, even though Mexico is rated BBB+ by Standard & Poor’s, two notches higher than Brazil’s BBB–.
In normal times, Mexico’s fundamentals stand out from Brazil’s. Mexico has a higher GDP per capita ($14,200 compared with $10,100), a more open economy (55% compared with 24% exports plus imports as a proportion of GDP) and lower public-sector indebtedness. Mexico has...
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