Insuring against debt defaults? Go abroad young man.
The financial crisis caused a flight to quality, sucking capital out of emerging markets in favour of theoretically safer investments in industrialized countries. But as developing economies lead the markets back with nearly 50% gains, they’re benefiting from an added boost: their default swaps are less expensive.
In other words, investors are more concerned about, say, California defaulting, than say, Russia.
“Credit-default swap prices from Turkey to Indonesia are falling as bonds rise amid signs that their economies are recovering faster than developed nations. As the U.S. and U.K. borrow record amounts to fund bank bailouts and stimulus, Brazil, Russia, India and China have $3 trillion in reserves, up 19 per cent from January 2008 and now 43 per cent of the worldwide total, data compiled by Bloomberg show.
The annual cost of protecting holdings in Turkey’s bonds fell by half to $200,000 per $10 million for five years, or 200 basis points, sinking below New York City swaps for two weeks starting July 22, Bloomberg data show. Indonesia debt insurance dropped below Michigan the next day. Brazil swaps just had their biggest four-month slide ever. For China, protection is near the cheapest in a year. Eleven years after Russia defaulted, investors want less to insure its debt than California’s.”
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