CDS Spreads

The credit ratings provide an investor with critical information to enable him to take an informed investment decision based on his RISK-RETURN preferences. These also help investors to select the appropriate investment opportunities from a LARGE RANGE of options available.Credit Ratings are determined by credit rating agencies. The big three are : Standard&Poor’s, Moody’s and Fitch.

Moody’s said late July 18 it was reviewing Turkey’s credit rating for a possible downgrade after the attempted military coup on the weekend. A one-notch downgrade from the current Baa3 rating would push the government’s rating down into “speculative” or junk status. Fitch, another of the three top rating agencies, said July 18 that the attempted coup “highlights political risks to the country’s sovereign credit profile.”

Lastly, Standard & Poor’s credit rating for Turkey stands at BB with negative outlook. Moody’s credit rating for Turkey was last set at Baa3 with negative watch outlook. Fitch’s credit rating for Turkey was last reported at BBB- with stable outlook.

MEANING OF CREDIT RATINGS:

credit-ratings-compared_2

DEFINITION of ‘Negative Watch’

A status that the credit-rating agencies (Standard and Poor’s, Moody’s and Fitch) give a company while they are deciding whether to lower that company’s credit rating. Once a company has been placed on negative watch, it has a 50% chance of its rating being lowered in the next three months.

Read more: Negative Watch Definition | Investopedia http://www.investopedia.com/terms/n/negative-watch.asp#ixzz4GfcEnQPo  

Thus, Turkey has a negative watch outlook  by Moody’s. This means  that Turkey has a 50 % chance of its rating being lowered in the next three months.

CREDIT DEFAULT SWAP(CDS)

Credit default swaps (CDS) allow sellers to take on, or buyers to reduce, the default risk on a bond. At its most basic, the pricing of CDS measures how much a buyer needs to pay to purchase, and how much a seller demands to sell, protection against default of an issuer’s debt. CDS spreads therefore are one way the market rates creditworthiness. Widening spreads suggest increasing risk.

Source: MarketWatch

Sovereign Credit Default Swaps (CDS) are financial contracts that measure the risk of default on sovereign debt: the higher the spread, the greater the risk of default. If the CDS prices rise, the country is at a growing risk of default. In other words, CDS spreads are a good proxy in order to measure the Country Risk. From this point of view, credit ratings and CDS spreads are linked to each other.

This time, I would like to compare the CDS spreads between Portugal and Turkey; Standard & Poor’s credit rating for Portugal stands at BB+ with stable outlook. Moody’s credit rating for Portugal was last set at Ba1 with stable outlook. Fitch’s credit rating for Portugal was last reported at BB+ with stable outlook. However, Portugal CDS spreads are even larger than  Turkey.

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 Source: DB Research 

CDS spreads show the risk of default of the countries and react faster than the sovereign credit ratings. After the failed coup in Turkey on 15th july in 2016, Turkey CDS spreads have affected by rising concerns about political risk and uncertainities about the economy and they have raised for a while, but never reached the Portugal CDS level. In other words, the spread on five-year Turkish credit default swaps is still below  the Portuguese level.

 TURKEY CDS LEVEL AFTER THE FAILED COUP 

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    Source: DB Research

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    Source: DB Research 

On the other hand, Turkey CDS level is now larger than the Russia and South Africa…

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