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CDS spreads for Argentina rise in Q3, fall for Brazil, Mexico

Sovereign credit default swap prices for Argentina continued to rise in the third quarter of 2018, although spreads fell for other key Latin American economies such as Mexico, Brazil and Chile, data from S&P Global Market Intelligence shows.

CDS spreads for Argentina remained the highest in the region, increasing 25.2% in the quarter to 586 basis points, as heavy inflation and a peso currency in freefall proved a lingering headache for President Mauricio Macri's government. Those pressures prompted S&P Global Ratings to place Argentina on CreditWatch negative, noting that the heightened risks could jeopardize fiscal adjustment initiatives and intensify the government's debt burden.

Argentina's economy faces gloomy prospects for 2018, with all three major rating agencies and the government itself forecasting a contraction for this year. According to preliminary data, GDP shrank 4.2% year over year in the second quarter and contracted 4.0% from the linked quarter in seasonally adjusted terms.

CDS prices for Argentina did fall from a peak of more than 800 basis points in early September after the central bank, in an emergency session, raised its benchmark interest rate to a record-high 60% and the government engaged in talks with the IMF for the early release of bailout funds. Spreads ticked slightly higher late in the month when central bank chief Luis Caputo abruptly resigned.

President Macri subsequently assured investors that there is "zero chance" of the country defaulting given the level of support it is getting from other states.

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Elsewhere in Latin America, Costa Rica recorded the highest spike in CDS prices in the third quarter, rising 33.7% to 245 basis points. CDS spreads for the Central American country remained stable for most of the quarter before jumping in late September as demonstrators took to the streets to protest a fiscal reform proposal.

According to Moody's, the "social unrest is negative for Costa Rica since it complicates fiscal consolidation efforts." The rating agency also identified Costa Rica as having the highest proportion of short-term debt in Latin America due to a continuous rise in its fiscal deficit in recent years.

In Brazil, CDS spreads fell 3.3% in the third quarter to 261 basis points, a welcome relief given that its spreads are still up 62.8% in the year-to-date. Uncertainty still grips investors as polarizing general elections draw closer with no progress on the passage of a long-overdue pension reform.

The cost of insuring exposure to Mexico in the CDS market declined 16.5% in the quarter to 113 basis points as the country struck a partial deal with the U.S. on the terms of a new bilateral trade agreement in the context of negotiations to revamp the NAFTA accord.

Meanwhile, CDS spreads in Guatemala ticked 12.5% higher in the quarter to 250 basis points. President Jimmy Morales has been widely criticized for his decision not to renew the mandate of international anti-graft body CICIG, which supported an impeachment proceeding against him while investigating his family for alleged corruption. Heightened political tensions in Guatemala could weigh on its economic prospects and take a toll on fiscal accounts already pressured by low government revenues, Fitch Ratings said.

CDS prices for Chile fell 28.9% in the third quarter to hit 45 basis points, the lowest in Latin America, followed by Panama and Peru at 58 basis points and 74 basis points, respectively.

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This S&P Global Market Intelligence news article may contain information about credit ratings issued by S&P Global Ratings, a separately managed division of S&P Global. Descriptions in this news article were not prepared by S&P Global Ratings.

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