Sovereign CDS and fiscal solvency

- "The hierarchy of sovereign CDS displays several apparent anomalies:
• between OECD countries (for example, is the risk on the United States, Japan and the United Kingdom so low?)
• between OECD countries and emerging countries, in one direction (very low perceived risk for some emerging countries: for instance Slovakia, Slovenia and the Czech Republic) or in the other direction (well-managed emerging countries still perceived as risky: for instance South Korea, Poland and Brazil)."
- "We seek to ascertain whether these apparent anomalies can be explained by looking at the situation of these countries’ public indebtedness and fiscal solvency, or whether they are real anomalies that can be expected to correct."
- "We show that:
• the countries where the return to fiscal solvency will require the greatest reduction in the fiscal deficit are the United Kingdom, France, Spain and the United States,
• the hierarchy of the CDS of OECD countries seems irrational, since it does not take into account the public debt ratio or the differential between the fiscal deficit and the deficit that would ensure fiscal solvency,
• the CDS of emerging countries can be partly explained by the public debt ratio."

Natixis Flash Economics 391 20100805

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