Sovereign risk falls after Dubai peak, says CDR

Credit Derivative Research notes that sovereign risk fell this week after peaking last week on news of Dubai’s debt crisis. All members of the CDR government risk index (GRI) saw their credit default swap levels drop as perceived risk fell. Still, the GRI is about 25% higher than its earlier third quarter level. The recovery among index members has been uneven as eurozone members (France, Germany, Italy and Spain) outperformed Japan, the UK and the US.  The US’s CDS level remains very close to last week’s level and is up about a third compared to its recent tight levels.

CDR continues to look at the GRI as an early warning signal for stalled economic recovery. The Dubai scare showed how quickly the credit and equity markets can sell off on bad news, it says. The GRI recovered to pre-crisis levels along with both the broader credit and equity markets.  Still, last week’s sovereign risk levels are elevated compared to earlier recent levels and at a time when the equity markets continue to push ever higher.