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Opinion

CDS: Panic hits emerging markets

With CDS prices at unprecedented levels, the crisis shows no sign of abating.

The financial whipsaw that has cut through the emerging markets in recent weeks has evoked bad memories of the 1990s when collapsing currencies, bank runs and IMF missions became commonplace.

Those crises – in Mexico in 1994/95 and in Asia and Russia later in the decade – were self-made. Today, the emerging markets have become caught up in the crossfire that began in the West and has now spread to all corners of the world.

Trying to make sense of what is happening is no easy task. Emerging markets are, for the most part, far better managed and have many more resources available than in previous crises but that seems to matter not a jot as even relatively strong countries are coming under attack. Indiscriminate selling is the order of the day as investors make a mad dash for the safe havens of the US dollar and treasuries. The sense of panic, moreover, shows no signs of going away.

Russia’s five-year CDS, for example, is trading at distressed levels of 1,123bp. Although Russia is still in reasonable shape compared to its peers, investors foresee greater risks ahead.

The sliding oil price potentially puts its current account and fiscal surpluses in danger of turning into deficits.

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