European credit-default swap traders positioned for emerging market swap spreads tightening last week in the wake of the Argentinean crises. London traders said banks were selling protection on eastern European names in the expectation that spreads will narrow as the market realizes the region would not be affected by Latin America's woes. One trader said the most popular countries to write protection on are Turkey and the Slovak Republic. For example, five-year protection on the Slovak Republic traded at 204 basis points Monday in comparison to 140/160 before the Argentinean crises and had already come in to 180bps Tuesday. Hedge funds and banks' proprietary desks put on the trades. Moody's Investors Service rates the Slovak Republic Ba1 and Standard & Poor's rates it double B plus.
The situation is different on Latin American names. Zack Vogel, v.p. credit derivatives trader at Deutsche Bank in New York, said "We are seeing more caution from sellers of protection on Latin American names compared to eastern European credits, because of the larger Argentina contagion risk in Latin America."
Olivier Desbarres, economist in the emerging market research team at Credit Suisse First Boston in London, said spreads on the Slovak Republic are likely to narrow once the market starts to focus on the individual credit again. He added that the Slovak Republic is due to hold elections in the fall of 2002 and if the coalition government remains in power the republic will likely be upgraded to investment grade, causing further spread narrowing.
Mid-Market Levels For Five-Year Protection On Argentina
