Are Credit Default Swaps Spreads High in Emerging Markets : An Alternative Methodology for Proxying Recovery Value

Author/Editor:

Manmohan Singh

Publication Date:

December 1, 2003

Electronic Access:

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Disclaimer: This Working Paper should not be reported as representing the views of the IMF.The views expressed in this Working Paper are those of the author(s) and do not necessarily represent those of the IMF or IMF policy. Working Papers describe research in progress by the author(s) and are published to elicit comments and to further debate

Summary:

In times of distress when a country loses access to markets, there is evidence that credit default swap (CDS) spreads are a leading indicator for sovereign risk than the EMBI+ sub-index for the country. However, it is not easy to discern the variables that determine the level of CDS spreads in Emerging Markets (EM); traders only quote the CDS spreads and not the inputs that are required to calculate such spreads. This note provides some evidence from Argentina and Brazil that reveals inconsistency between theory and practice in pricing CDS spreads in EM. This note suggests an alternate methodology that links CTD (cheapest-to-deliver) bonds to recovery values assumed in CDS contracts. Furthermore, special features that pertain to CDS contracts (repo specialness, short squeezes by central banks) may also magnify the financial distress of a sovereign.

Series:

Working Paper No. 03/242

English

Publication Date:

December 1, 2003

ISBN/ISSN:

9781451875836/1018-5941

Stock No:

WPIEA2422003

Price:

$15.00 (Academic Rate:$15.00)

Format:

Paper

Pages:

8

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