Are developed economies the risky bets now?

by | Nov 22, 2010


The FT’s John Authers was asking a pretty seminal question last week:

Do we have the emerging markets all wrong? When money goes into China, Brazil and other hot destinations in the emerging world, traders call it a “risk on” trade. Whenever investors feel comfortable about taking risks, the emerging markets benefit.

But could the emerging world now be a destination for those looking for security? That is what the credit markets say. Either they are wrong and emerging market credit is in an incipient bubble, or we need to turn received wisdom on its head.

Credit default swaps put a precise number on the risk the market attaches to default by different countries. This is expressed as the percentage cost of insuring a country’s debt against default within five years. So, for example, the chart shows that insuring against a sovereign default by the UK in the next five years will cost you 0.6 per cent of the principal. For Spain, caught up in a crisis of confidence, this will cost you 2.56 per cent: so the market views a Spanish default as much more likely than a UK default (and does not think that either is very likely).

What is fascinating is the market’s comparative judgment of the risk in emerging markets. Insuring against a default in China is exactly as expensive as in the UK – 0.6 per cent. The list of countries deemed safer than Italy (1.82 per cent) includes Mexico, Brazil and Chile, Russia, and even Indonesia (1.39 per cent).

Author

  • Alex Evans

    Alex Evans is founder of Larger Us, which explores how we can use psychology to reduce political tribalism and polarisation, a senior fellow at New York University, and author of The Myth Gap: What Happens When Evidence and Arguments Aren’t Enough? (Penguin, 2017). He is a former Campaign Director of the 50 million member global citizen’s movement Avaaz, special adviser to two UK Cabinet Ministers, climate expert in the UN Secretary-General’s office, and was Research Director for the Business Commission on Sustainable Development. Alex lives with his wife and two children in Yorkshire.

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