Fitch: Sovereign CDS Exposure Climbs $1.5T; Greece Highlights Restructuring Language

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NEW YORK--(BUSINESS WIRE)-- Link to Fitch Ratings' Report: Eurozone Crisis Driving Notional Exposure While Interesting Questions Remain http://www.fitchratings.com/creditdesk/reports/report_frame.cfm?rpt_id=656770

Gross notional exposure to sovereign entities has climbed nearly $1.5 trillion since the end of 2008, with Europe accounting for approximately two-thirds of the total increase, according to Fitch Ratings in a new report.

While gross notional has grown significantly over the past few years for many names, including some of the most cited like Greece, Portugal, and Italy, actual net exposure appears quite low at under 2% of total debt. This provides additional context as to the true extent of positioning/hedging taking place. However, CDS can still meaningfully influence the broader bond market. Emerging markets share of total sovereign CDS gross notional outstanding is also considerable. While declining, Latin America's share is a still high 18%, while Asia comes in at 13%.

How gross and net CDS amounts have evolved through time varies significantly. Countries with a more constructive outlook, like Brazil, have seen significantly different patterns than the aforementioned Eurozone countries. While all sovereign spreads have widened over the past several years, a closer look reveals that Europe on average is trading wider than virtually all others. This is all the more startling because not long ago, Europe exhibited among the lowest CDS spread levels of all regions. Conversely, CDS on Latin America has on average widened the least of any region over the same period.

If a sovereign engages in a distressed debt exchange, it can impair creditors significantly. At the same time, a distressed debt exchange may not trigger a credit event, which may potentially leave a buyer of CDS protection vulnerable. This is due to current CDS language and the fact that such an exchange may be considered 'voluntary', even if deemed by bondholders necessary to avoid an outright default. The possibility of another type of credit event being triggered along with the CDS spread widening seen to date does benefit the protection buyer. That being said, the disconnect in cash flows between a bond position and CDS contract adds a wrinkle that all investors need to be aware of.

It is important to note the distinction between a 'credit event' and potential ratings default. While the latter relates to actions taken by Fitch or any other credit rating agency, only the ISDA Determination Committee can determine a 'credit event' which triggers credit default swap (CDS) contracts.

'Eurozone Crisis Drives CDS Notional While Interesting Questions Remain' is available at 'www.fitchratings.com' or by clicking on the above link.

Additional information is available at 'www.fitchratings.com'.

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Fitch RatingsJames BattermanManaging Director+1-212-908-0385Fitch, Inc.One State Street PlazaNew York, NY 10004orKrishnan RamaduraiManaging Director+44 20 3530 1004orMedia Relations:Sandro Scenga, +1-212-908-0278 (New York[email protected]

Source: Fitch Ratings

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