No emerging market has garnered as much negative attention in recent days as Russia. Some of that negative attention includes increased chatter that Russia could be at risk of a sovereign debt default.
“Last Monday, the probability of a default on the debt of the Russian Federation was ~20%. By the close of business on Friday that jumped all the way up to ~25%. Psychologically, a 1 in 5 probability changed to 1 and 4 likelihood in just five days. That is a big move. The default probability at the time of writing is ~28.5%, a 3.5% jump since last Friday,” said Rareview Macro founder Neil Azous in a research note out Monday. [Russia ETFs Slide as Default Odds Rise]
If there is good news as it pertains to Russia’s balance sheet it is that the country has $400 billion in currency reserves compared to $38 billion in dollar-denominated debt, of which just $6 billion in principal and interest comes due in 2015.
While investors the world over are focusing on Russia, swaps markets may be saying another member of the BRIC quartet is equally or perhaps more vulnerable to default than Russia is. Shares of the iShares MSCI Brazil Capped ETF (NYSEArca: EWZ) are down two-thirds of a percent at this writing, but earlier Tuesday the largest Brazil ETF flirted with a $32 handle, a price the ETF has not closed below in over nine years. Even with intraday rally, EWZ labors around its lowest levels since January 2009.
What is rising are five-year credit default swaps (CDS) used by traders to protect against a Brazilian sovereign debt default. On a technical basis, those CDS have “broken above a multi-year rectangle, a simple but powerful technical development that says ‘this time is different,” said Azous.
As Azous notes sovereign defaults are not foreign in Latin America. Argentina is on its third sovereign default in less than 30 years. Tumbling oil prices have put OPEC member Venezuela in such a precarious financial position that swaps markets indicate a default there is all but a foregone conclusion. [Oil Problems Pressure EM Bond ETFs]
“The fact is that from 1970 to 2000 there was a crisis almost every two years in LatAm and depending on what your definition of a crisis is or what country is involved there have been 25+ episodes between the mid-1990s and the Global Financial Crisis. The key point being is that investors are very mindful that further crises in LatAm can easily develop and Russia or crude oil can easily be that excuse,” according to Azous.