The news from the financial markets are always funny to read: among many other things, one learns that for all the trouble the MENA region is heading to -or, for some countries there already experiencing it- the cost of insuring their sovereign debt is much lower compared to Greece. Incredible! Or is it?
Consider the following graph; I have to apologize for incomplete information, especially regarding the more recent levels of CDS on Greece, and for Egypt I had to crunch the missing numbers in order to get the current level. When one takes a careful look at these levels, and the way they evolve, there are many thoughts one could foster on the MENA region: Tunisia is a surprisingly low risk, when compared to Greece, or even to Egypt. The level of risk, captured via the CDS did certainly not justify the downgrading by Moody’s. Or if Moody’s did so, it has little to do with its political risk.
And for one, Leila Trabelsi was directly responsible for absconding 1.5 tons of gold bullion, which means € 45 Million, or $ 58 Million approximately. The sum might look like small beer, but when one keeps in mind the level of government debt Tunisia has -about $ 25 Billion- then it is obvious that annual payment can be endangered by that kind of blow; Not to mention the effect this has on the exchange rate the Central Bank Of Tunisia wants to sustain. There are other issues about the country’s sustainability in terms of economic growth, but it seems the downgrade was not, shall we say politically motivated, nor was it in reaction to market anxiety over developing events. And the market data shows it: the level of CDS remained remarkably stable, and for a troubled country, the financial markets do not seem to mind the difference with Morocco -as late as February 3th, CDS were slightly lower for Tunisia that Morocco’s-.
Why are Credit Default Swaps a good indicator for a sovereign debt? First, CDS are considered to be an insurance, mainly a guarantee against possible likelihood of default. In that sense, political instability, poor economic policies or unexpected low growth result can be indiscriminate factors in worsening CDS levels. In that sense, CDS are quite useful, but in the sense that they are signals: their prices are subject to demand and supply, and if their price goes up, it is a signal that, say for the Egyptian sovereign debt CDS to climb up to 400bps and counting, it means, first, that to insure $ 10 Million of Egyptian debt, an investor has to take on an insurance of $ 400.000. The signal is about expectations investors might have of the future. The more pessimistic they feel, the higher the price of CDS. And for the moment, levels of expected risk, in Tunisia or Morocco are very similar. Strange?
The same goes for Egypt: even though the country started from comparatively higher levels of risks (the higher CDS level, the higher the perceived default risk, markets-wise) they still operate at early 2009 levels, at which time Mubarak’s position was not particularly threatened – in fact, no one at the time would have bet a dime on successful demonstrations that we are witnessing today and since a fortnight. Again, a source in financial markets tell me that for all the media frenzy -and the local damage to the economy- foreign debt-holders are relaxed even with regime change, whether in Tunisia or Egypt, or other countries that might be on the waiting list. There remain countries like Morocco that were confirmed in their near-investment rating. At the time, and perhaps it might remain so, rating agencies do not see enough warning signals to downgrade the rating, perhaps because financial markets do not seem to mind the whiff of liberty in MENA.
In any case, the rumblings in the MENA region do not look harmful to the financial markets, as they rate Greek sovereign debt far more likely to default. this is good news for would-be protesters too worried they might compromise their country’s ‘good name’. It is also bad news for Greece, but ethnocentrism doesn’t involve me in feeling sympathetic to their miseries. I don’t know if I can stress enough the importance of these results: the MENA region has been experiencing, for many countries that is, sustainably high levels of growth, but the distribution effect has been marginal across countries. The current wave of public anger is not primarily motivated by political claims -this, in my opinion, comes with street protests- but rather by more redistributive policies. It seems financial markets, up to a point, do not mind that.