The cost of market insurance against default on state obligations of Russia jumped six times in one day against the backdrop of the start of a military operation in Ukraine. This is a historical maximum for this financial instrument
Photo: Andrey Rudakov / Bloomberg
The so-called five-year CDS spread on Russia’s public debt, which reflects the perception of country risk by international financial markets, increased by 540% to 950 basis points (bp) on Thursday, February 24, follows from the data of the terminal Bloomberg. A day earlier, the CDS quote was only 148 bp.
This is a record value for CDS for Russia, the previous historical maximum (about 800 points) was recorded in early 2009 against the backdrop of the global financial crisis. In March 2014, after the annexation of Crimea, insurance against Russian default did not rise above 300 bp.
A CDS, or credit default swap, allows its buyer to insure against default on third party obligations in exchange for regular payments. The higher these payments, the more risky the underlying liabilities are considered.
Current levels of CDS on Russian sovereign debt mean that it costs investors about $950,000 a year to insure against default on Russian government bonds for $10 million over a five-year period. This is a very high level by world standards, but not the largest: for the Ukrainian state debt today, the cost of market insurance reached 2465 bp.
Today, there was a “large-scale” expansion of CDS spreads both to Russia and Ukraine, Natalia Gurushina, chief economist for emerging markets at the American management company VanEck, told RBC. She noted that the current CDS quotes for Russia’s public debt are much higher than in 2014.