Brazil’s CDS, a measure of sovereign risk, resumes trading over 200 points
RIO DE JANEIRO, BRAZIL – Along with the increase in the risk premium in other financial indicators, the Brazil risk measured by the five-year credit default swap (CDS) contract spread has once again traded above 200 points and, this morning, stood at 212 points, according to data from IHS Markit.
This value reveals a 3.54% implied probability of default, on a 40% recovery rate supposed.
The CDS, short for Credit Default Swap, is a financial market bond that works as insurance. It is issued by financial institutions and guarantees its holder loss coverage in case of default in the countries’ securities.
The lower the country default risk, the lower the corresponding CDS score – i.e. closer to zero. Hence, the higher the risk of default, the higher the CDS score.
The CDS again crossed the symbolic 200-point mark on Monday, March 8th, a day in which the perception of political risks increased and the government signaled a potential reduction of the Emergency PEC.
CDS value changed +10.57% during last week, +36.15% during last month, +47.5% during last year.
Brazil’s five-year CDS thus again neared the level of South Africa’s CDS, which has been trading above 200 points since the covid-19 crisis erupted in March last year. This morning, South Africa’s five-year CDS was trading at 234 points.
It is worth noting that the two countries’ sovereign ratings are at similar levels, according to the three major rating agencies. According to S&P Global Ratings, Brazil and South Africa’s credit rating is set at “BB-“, with a stable outlook, while Fitch assigns a “BB-” rating to both countries, with a negative outlook.
Brazil and South Africa are rated “Ba2” according to Moody’s criteria, but the agency considers Brazil’s rating with a stable outlook, while South Africa’s rating has a negative outlook.
Source: Valor
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