Banana Republic Watch: Credit Default Swaps on Russia Cheaper Than on California

Oh, there is nothing like a global retreat of liquidity to reveal who was wearing a swimsuit. And what wags like Warren Buffett fail to add, when a lot of people were found to be unclad, you also get to see who looks best of a typically not so fetching bunch.

In this case, California is being deemed a worse credit risk that Russia. Of course, that view would change quickly if oil prices were to decline sharply, as some observers like Philip Verlegger predict. But this isn’t a fluke. Many emerging markets credits now have CDS spreads below that of many states and New York City.

From Bloomberg (hat tip DoctoRx):

Investor demand for emerging-market bonds is driving the cost of insuring against debt defaults below industrialized governments for the first time.

Credit-default swap prices from Turkey to Indonesia are falling as bonds rise amid signs that their economies are recovering faster than developed nations. As the U.S. and U.K. borrow record amounts to fund bank bailouts and stimulus, Brazil, Russia, India and China have $3 trillion in reserves, up 19 percent from January 2008 and now 43 percent of the worldwide total, data compiled by Bloomberg show.

The annual cost of protecting holdings in Turkey’s bonds fell by half to $200,000 per $10 million for five years, or 200 basis points, sinking below New York City swaps for two weeks starting July 22, Bloomberg data show. Indonesia debt insurance dropped below Michigan the next day. Brazil swaps just had their biggest four-month slide ever. For China, protection is near the cheapest in a year. Eleven years after Russia defaulted, investors want less to insure its debt than California’s.

“This would have been impossible to imagine a year ago,” said Dmitry Sentchoukov, an emerging-market credit strategist at Dresdner Kleinwort in London. “Now it’s clear emerging economies are going to outperform the Group of Seven in growth, and that makes investors comfortable with the idea that developing countries can be priced richer than developed.”…

The average cost of swaps for sovereign debt from 45 developing countries has declined to 314 basis points, the lowest since October, from 785 basis points five months ago…. Emerging-market bond funds held almost $49 billion on July 31, the most since October, after their biggest weekly cash influx in a year. They’ve attracted more deposits than withdrawals every week since April 13, following eight months of declines, said EPFR Global, a Cambridge, Massachusetts, researcher…

Emerging economies probably will expand 1.5 percent this year and 4.7 percent in 2010, the International Monetary Fund forecast July 8. Developed economies likely will shrink 3.8 percent in 2009 and grow 0.6 percent next year, the IMF said. The U.S. is in its worst downturn since the 1930s with consumer spending, 70 percent of gross domestic product, dropping at a 1.2 percent pace in the second quarter…..

Swaps on California have risen more than three-fold in the past year as its credit rating was lowered two levels to Baa1 by Moody’s, the same level as Russia, which reneged on $40 billion of sovereign debt payments in 1998. Russian default swaps are near a 10-month low of 255 basis points, about 20 basis points less than contracts linked to California. The former Soviet state’s 7.5 percent, 2030 dollar bonds are at a 2 1/2-month high of 101.74 cents on the dollar.

“If California is issuing their own dummy currency in the form of IOUs, that’s not a good sign,” said Augustus’ McNamara.

Russia has an “extremely low” debt-to-GDP ratio of about 10 percent which is attractive to “any type of bond investor,” said Luis Costa, an emerging-market debt analyst at Commerzbank in London. “For as long as U.S. municipal and state governments are in trouble, I think this trend will continue.”…

“This trend of lower sovereign spreads will continue,” said Richard House, who manages $1.1 billion in emerging-market debt at Threadneedle Asset Management in London. “Balance sheets are so strong now and most governments don’t need to sell debt in the external markets.”….

Swaps for New York increased more than three-fold in the past year. The world’s financial capital, rated nine levels higher than Turkey by Moody’s Investor’s Service at Aa3, faces unemployment close to 10 percent and reduced tax revenue from Wall Street firms. New York City Mayor Michael Bloomberg is founder and majority owner of Bloomberg News parent Bloomberg LP.

As emerging-market bonds rally and swaps plummet, stocks from those economies are leading a climb in global equities. The MSCI Emerging Market Index has added 51 percent this year, compared to a 15 percent increase in the MSCI World Index of developed stocks.

McNamara of Augustus Asset Management said he has reduced his investments in credit-default swaps this year because they are less liquid than bonds and have higher capital requirements and regulatory risks.

“They have lost their competitive advantage to bonds,” he said.

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  1. Doc Holiday

    Let's not water this down — let's put the sex back in nakedcapitalism!!!!!

    Re: "when a lot of people were found to be unclad, you also get to see who looks best "

    Yah, you can say that again all day long!

    CDS are not unlike a beauty contest, where risks associated with broken bikini strings are not unlike the risks associated with CDS ratings by Moody's, Fitch & S&P could snap as easy as a payoff or bribe — so let's see what the facts reveal (thanks to Wiki):

    By Number of Wins "League Tables" (Miss Universe is an annual international beauty contest run by the Miss Universe Organization.)

    USA = 1954, 1956, 1960, 1967, 1980, 1995, 1997

    Russia = 2002 (Dethroned on September 23, 2002)

    Ok, let's stop right there …. Oxana Fedorova (Dethroned) …. is that like having your CDS default?

    In 2002, Russia's Oxana Fedorova won the Miss Universe crown. However, she was dethroned on September 23, 2002 by Miss Universe Organization.

    Fedorova denied the pregnancy rumors and stated that she voluntarily gave up her crown for personal reasons, mainly because she wanted to finish her law degree.

    Ok, so Russia kicked our ass in The Universe thing, but what about the other stuff?

    Miss World & Best Performances by Country?

    The USA is nowhere to be found, and I'm still searching my ass off for something to connect to some hot-looking chick in California …. but, once again, America gets its ass kicked and isn't even on the radar. Nonetheless, Ksenia Sukhinova kicked ass in winning Miss Russia 2007 and Miss World 2008 pageants.

    But look at this, America ends up with some weird, CDS-like derivative that gets a AAA rating by all the rating agencies:

    "Nancy Valeria Randall is a Brazilian American actress, model, television host and anthropologist. She won the title Miss World USA in 2004. She won the Swimsuit competition and placed 2nd Runner Up at the Miss World 2004 pageant ."

    Ok, so what's up with that, i.e the hybridized non-Californian beach chick and the substituted semi-Brazilian correlated swap?

    This is just like the same thing that happened here: "Tami Nichole Farrell (born October 5, 1984) is a beauty queen from Phoenix, Oregon who was Miss Teen USA 2003 and became Miss California USA in 2009."

    Is that legal?

    I don't think I care for (any of) that, but it does prove to me, beyond a doubt that there is manipulation at every turn of events in this world of beauty queens — obviously, there is a dark world of crappy shadow-like puppet shows, where shadows on the cave wall are projected with laser-like precession in efforts to delude us all into thinking that the pea is not under shell number one, two or three, but under the mattress of the judges, who are paid off, the judges, who are always on the take — be they on the take at Moody's, Fitch, S&PP or some high school auditorium where there is an inside track on being able to abuse your friggn discretion in some capricious way.

    Maybe these beauty models are metaphors for F'ing ratings models and maybe we need to get back to basics and be nude, and forget about all the styles and trends that are tossed in our faces by the latest financial regulators and judges, who try to pull the wool over the obvious….

    Also see: Monokini: A women's swimsuit with one piece that exposes the breasts, originally invented by Rudi Gernreich in 1964. Monokinis are available in many stylistic variations, and generally refers to a bikini bottom, or thong worn alone without a top.

    Mankini: A buttock-revealing unitard swimsuit for men popularized by Borat.

    FD: This is F'ing insane…. the author has gotten a bit off track and has decided not to look at this post ever again…. or edit anything, so WTF?

  2. Anonymous

    "Bloomberg data show. Indonesia debt insurance dropped below Michigan the next day."

    If the headline in tomorrow's NYT's business section says that Indonesia has defaulted on its bonds, I'd say that's nice and move right on to the sports section; if it said Michigan, I'd probably start pulling money out of my bank accounts. I think I see some tail risk being ignored,and not much of a tail at that. Back to 2007….

  3. Independent Accountant

    Why shouldn't California be a poorer credit risk than Russia? It's politics clearly is to Russia's left. Besides, Russia has Putin. All California has is the Governator.

  4. Anonymous

    "Why shouldn't California be a poorer credit risk than Russia?"

    Because the US government (which is also to Russia's left) would bail California out.

  5. selise

    please excuse my ignorance…. but is russian public debt now in its own or some other currency? if its own, is it convertible? are there fixed exchange rates?

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