Is Australia at risk of defaulting on its sovereign debt?

[Timmy]

Is Australia at risk of defaulting on its sovereign debt?

This is a link to a table showing the market price of current credit default swap (CDS) prices for the sovereign debt of 38 countries:

Country Default Risk

Out of the 38 listed, Australia is one of the lowest risks, above France and Germany but below Belgium and the US.

Here is are some explanations of what a CDS is:
Credit Default Swaps Explained
Credit default swap

 

[MR.]

Note: The cost to insure $10,000- of Australian debt for five years at the end of last year was near twice that of the US...... Huh!

Guess a few thought Australia was a higher risk to default than the US last year!

 

[Temjin]

Based on the actions from most developed and emerging countries in dealing with the GFC, it's highly unlikely that any of them would default on its sovereign debt. Printing press is the easiest way out.

 

[jono1887]

why don't we have a rating for start of 08?

 

[Timmy]

why don't we have a rating for start of 08?

Just to clarify Jono, these are not 'ratings', they are market prices. I don't know why no figure for Australia at the start of '08, sorry.

 

[Timmy]

Based on the actions from most developed and emerging countries in dealing with the GFC, it's highly unlikely that any of them would default on its sovereign debt. Printing press is the easiest way out.

I can't makes sense of this Temjin. If the ownership and use of a printing press was the only variable then there should be no difference by country in these prices (assuming each country has a press)?

 

[Timmy]

Guess a few thought Australia was a higher risk to default than the US last year!

Yes, I think that would be the conclusion.

 

[Temjin]

I can't makes sense of this Temjin. If the ownership and use of a printing press was the only variable then there should be no difference by country in these prices (assuming each country has a press)?

That's only if you are assuming every countries out there are in the same fiscal circumstances and require the excessive use of printing press to solve their debt problem. Australia is doing pretty well in this respective, regardless if we had the ability to monetise debt.

Of course, it's alot more complicated than that. I'm only merely suggesting that since unbacked fiat money was introduced into almost every single countries on this planet, the risk of defaulting on sovereign debt has significantly reduced, or rather, the "line" was extended far further out at the expense of those who are holding its currency and to the future generations.

Since those CDS are priced based on the market expectation of a country's ability to meet its debt obligation, that expectation (or perception) could change at any moment when new information becomes available. Perception can be manipulated as well.

 

[alphaman]

Am I interpreting the prices right? Looks like the CDS market thinks we are more risky than US.

 

[Timmy]

Am I interpreting the prices right? Looks like the CDS market thinks we are more risky than US.

No. From the article:

The US CDS price is quoted in Euros.

All of the other prices are quoted in USD.

So, with the price (for the US) at 21.5 Euro, which if you use an exchange rate of around 1.50 (roughly where it is as I type), you get 32.25 USD. Compared to Aust. priced at 26.5.

Temjin - thanks for the clarification. I understand your point now, thank-you.

 

[alphaman]

Thanks Timmy, makes more sense now.

Interesting how China is priced higher risk than US.

 

[Timmy]

Thanks Timmy, makes more sense now.

Interesting how China is priced higher risk than US.

China is basically double the price of the US. Hadn't noticed that - seems weird to me too?

 

[MR.]

The US CDS price is quoted in Euros.
All of the other prices are quoted in USD.

How do you know the rest are in USD's?

Why would the US be quoted in Euro's and all other countries be in USD's? Arn't they all quoted in Euro's. As far as I can tell the reason why the quote "The US CDS price is quoted in Euros." is because that is the target market the article was written.

 

[Timmy]

Because that is how the market is quoted. But, DYOR if you wish.

 

[MR.]

Because that is how the market is quoted. But, DYOR if you wish.

Ok.... Just seemed a little strange to list the countries like that.
A quote from the following link:
http://www.acredittrader.com/?p=81

US CDS is traded in euros and that in order to do a proper apples-to-apples comparison to US-traded corporates you would need to first translate the EUR spread to a USD equivalent spread.

"US traded corporates" it makes sense being the other countries on the list.

Even the dark green shading (ie: US 21.5) on the list is there to only confuse the un-educated in CDS's.

with thanks Timmy.
I wouldn't have worked that one out!

 

[Timmy]

MR. - Thanks for that link, a lot of good info there. I'm not overly familiar with these things either, so it is good to share what we find out amongst ourselves.