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Beware of Greeks Bearing Risk

Gaurav Sharma 06/07/2010 Any collaboration between public bodies, such as local authorities or central governments and the private sector hinges on both parties meeting debt and spend obligations. Sovereign risk, above anything else, makes the private sector wary. At present, the attention is focussed on Greece, and perhaps has been for a while. Despite a bail-out, according to research conducted by CMA DataVision, deterioration of Greece's debt over Q2 2010 has made it the second-riskiest sovereign in the world. The country's 5-year credit default swap (CDS), rose 1,003.4 basis points over April to June, suggestive of a 55.6 per cent risk of a default. Greece is second only to Venezuela, which on a CDS of 1,305.7 basis points, remains the riskiest sovereign credit with a default risk of 58.7 per cent. Despite Venezuela's position, Greece's fall from grace, or rather nine positions on the CMA DataVision table, is nothing short of spectacular. Furthermore, towards the end of the quarter Greece temporarily overtook Venezuela as the sovereign with the highest default probability. On the other hand Iceland and Egypt have exited the top ten, replaced by Eastern European nations Romania and Bulgaria. Globally, the potential for default is rising, with a range of 22.8 per cent (Bulgaria) to 58.7 per cent (Venezuela) over Q2 2010 compared to 16.5 per cent (Egypt) and 48.5 per cent (Venezuela) over Q1.

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(Source: CMA DataVision Global Sovereign Credit Risk Report Q2 2010) The Greek debt crisis has had a knock-on effect on private sector investment in Western Europe where the worst performing sovereigns in the quarter ending June were Greece, whose percentage rise in CDS was 190 per cent, followed by Belgium, whose CDS rose 168.5 per cent. Spain's CDS was third worst-performing with a 129.2 per cent jump, Portugal fourth with a 127.3 per cent rise, and France fifth with a 112.3 per cent gain in the protection cost of debt. Conversely, the world's safest sovereigns were Norway and Finland followed by the USA in third place (up from tenth in the previous quarter). The lowest default risk remains geographically concentrated around Western and Northern Europe. However, the euro zone's safest bonds - the German Bunds - slipped in the ranking coming in at sixth-safest compared with third-safest in the first quarter. The UK's CDS has shown fairly little change over Q2 2010, widening slightly by 2 per cent. The new UK coalition government has announced a reduction in the scale of state spending and tax increases to help bring the UK's public debt under control. This is likely to curtail infrastructure spending, though the extent of this would not be known before the government announces a comprehensive spending review in October. Simon Mott, the report's author, says the major widening action in European sovereign credits indicates that the euro zone remains the hub and focus of the global debt crisis - none of the Western European sovereign CDS have tightened this quarter. "How governments with large deficits respond to improving their credit standing is open to question. Essentially, they could respond via wide range of measures from reducing spending on infrastructure to raising taxes. If they chose the former, as some might, then infrastructure spending could suffer," Mott told IJ.

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Overall, 93 per cent of the sovereign CDS tracked by CMA DataVision widened over the second quarter with the cost of debt protection increasing by an average of 30 per cent. Only 7 per cent of the sovereign CDS that CMA tracks showed improvement this quarter. Howard Archer, chief European economist at IHS Global Insight, says finding Greece on a list of riskiest sovereigns is hardly a surprise, but other countries in Europe have problems and there is no blanket approach despite a common currency. "Apart from tax rises, some nations may place an emphasis on public spending cuts and curtailing infrastructure spending. Yet others may choose merely to put projects on ice for a few years, preferring a delay rather than an outright cancellation of a project," he added. Infrastructure projects in countries like Greece, Latvia and Bulgaria will suffer, but Archer notes that even Germany, which issues the euro zone's safest debt paper and figures on several "safest" sovereign risks lists, is scaling back investment. The private sector spends billions of dollars tendering for infrastructure projects with a variable capital exposure depending on which international project finance market is looked at. For these players, sovereign risk is becoming a key source of concern in more ways than one following the Greek debt crisis. Most would rather invest in a German project than a Greek one. Problem is, the latter cannot afford to spend on infrastructure, and the former would not commit to spending - at least not in an age of austerity.

This article was first published by the Infrastructure Journal on July 6, 2010. An online copy of the feature may be seen here.

All content © Copyright 2010 Emap Limited, all rights reserved.