CDR Launches Government Risk Index

March 31, 2009


A new index, designed to track the creditworthiness of leading sovereign debtors, has been launched by Credit Derivatives Research LLC ("CDR").  The Government Risk Index ("GRI") is an index of the credit default swap ("CDS") spreads of the United States, United Kingdom, Germany, France, Italy, Spain and Japan. Sovereign CDS are designed to protect the buyer against a default or other "credit event" on a country's debt.  A typical sovereign CDS insures against an issuer's failure to pay, debt restructuring, and any debt repudiation or moratorium.


Public sector deficits have soared in many countries over recent months, as governments take on liabilities from the banking sector and attempt to stimulate demand, and the cost of insuring against sovereign default has risen sharply.  The GRI index rose from 12 basis points on 1 January 2008 to 82 basis points by year-end.  It hit a peak of 131 basis points on 17 February this year, before falling back to the current level of around 90.

"Rapidly increasing budget deficits and debt levels, nationalization of large failing financial institutions, deepening recessions, disproportionate foreign holdings (e.g., by China) and loosening monetary policies have led many investors seriously to consider the possibility of a credit event by one of the major sovereign borrowers, or at least to speculate on their credit quality," said Arthur Rosenzweig, president of CDR. 
CDR also publishes the Counterparty Risk Index ("CRI"), which tracks the credit risk of the 14 banks that are the most prominent credit derivative counterparties. "The GRI and the CRI are not as correlated as you might suppose," said Dave Klein, manager of CDR Credit Indices. "Initially, government risk lagged concern over the large financials. More recently, the difference of CDS levels between the two groups varied on investors' perception of nationalization risk."
Within the GRI index, CDS spreads on US sovereign debt trade near 70 b.p., UK 115 b.p., Germany 55 b.p., France 60 b.p., Italy 145, Spain 105 b.p. and Japan 90 b.p. CDR will publish daily values of the GRI at noon ET. 


Find your next ETF

Reset All