Sovereign risk continues to rise, says CDR

Credit Derivatives Research reports that sovereign risk continued to rise this week as all members of its GRI index except Japan added risk. The Government Risk Index broke through the fifty basis point mark this week for the first time since late July. Japan’s standout rally came only after the name experienced a run up in risk the week before even as the other majors rose only modestly. 

Since 1 October, the GRI rose by about 25%.  However, clear winners and losers emerged in that time period.  Germany barely budged off its previous levels and France is modestly riskier. Spain and Italy, the riskiest members of the index, are both up about twenty percent while the US, the UK and Japan all trade riskier by over 40%. After last week’s moves, the US and Japan saw their CDS rise by the same amount on a relative basis over the past two months. 

As the financial crisis kicked into gear in the second half of 2008, the GRI lagged corporate credits (and financial credits in particular) as risk skyrocketed. This second half, the sovereigns lead the way wider. CDR interprets a continuation of the trend wider as the market taking a view on rising systemic risk. In other words, a continued rise in the GRI is an early warning sign that market participants expect a stall in global economic recovery and corporate credit (and equities) would be expected to deteriorate.