The impact of wider sovereign CDS spreads
By Andrew Lim
Published: February 9 2010 16:03 | Last updated: February 9 2010 16:03
Widening spreads on sovereign credit default swaps (CDS) are having a contagion effect, leading to an increase in CDS spreads for banks domiciled in those countries, says Andrew Lim, analyst at Matrix Corporate Capital.
“The rationale for the increase in banks’ CDS spreads is that the countries in which they are domiciled are likely to suffer severe economic contractions as measures are taken to bring their fiscal deficits under control,” says Mr Lim.
Matrix says the problems faced by Portugal, Italy, Ireland, Greece and Spain are exacerbated by the fact that as eurozone members, they cannot devalue their currencies. “Unlike the UK, they cannot rebalance their relative lack of competitiveness.”
Matrix looked at the movement in bank CDS spreads and the proportion of their debt that requires refinancing this year to assess which banks could face significantly higher funding pressures in the short-term.
“Banco Comercial Portugues is at significant risk,” says Mr Lim. “We should also be very concerned about Santander, BBVA and Allied Irish Bank.”
Matrix stresses that the sovereign debt crisis is a dynamic situation where CDS spreads are likely to change quickly for both banks and sovereigns.
“The circumstances could rapidly deteriorate, or indeed improve, for those banks and countries deemed at risk.”
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