Romania"s perceived sovereign risk continues to decrease, as reflected by CDS quotations

CDS quotations - which estimate the risk of Romania defaulting on its debt - continued to drop to 239 basis points, according to data by CMS Data Vision, due to improving investor sentiment on emerging markets, which include Romania.

Bankers feel that a drop in quotations of CDS can mean an improved perception of Romania"s sovereign risk, generated by various factors such as improved economic forecasts or an expected appreciation of the local currency.

According to the latest bank predictions, the Euro will continue to grow cheaper on the domestic market, with some banks expecting the local currency to go below the 4 lei/Euro level.

Romania currently has a higher risk premium than Hungary (220). France, for instance, has a CDS spread of just 38.95, and in the case of Greece, which holds the ninth position among the riskiest countries in the world, the CDS spread is 338 points.

According to the CMS Data Vision platform, the riskiest countries are Argentina and Ukraine, with the spread on their CDS exceeding 1,000 basis points.

In the second semester of 2009, the political crisis strongly affected Romania"s credit risk rating, with the 5-year CDS quote climbing around 6%, to 264 basis points, causing Romania to have the largest credit risk deterioration.

Also, in the beginning of March 2009, CDS quotations for Romania reached a peak at 760 basis points, amid negative sentiment in the region, with many investors expecting the Eastern and Central European region to face severe economic issues. However, once foreign sentiment improved, the spreads began to narrow down to around 300 percentage points (pp), in Q2, and 200 pp, in Q3 respectively.

The effect of the current drop in CDS quotations can be felt in the shrinking cost of foreign financing, as lenders (banks, foreign companies) are less interested in insuring their receivables on the borrower (banks, municipalities, and the government), since the risk of default on the loan drops significantly.

CDS are a form of insurance, with the creditor paying regularly a specified amount to the issuer of the CDS, which increases its costs. However, part of this cost is also transferred to the debtor, who will now pay less, for the same amount, then it would have paid had it borrowed money a few months earlier.

Apart from protecting creditors, CDS quotations are increasingly used on the international markets to calculate the interest rates for major foreign loans. For instance, the interest rate for the 1 billion Euros that the Government borrowed from banks in a syndicated loan last July, the interest rate for the loan was calculated based on the CDS spreads at the time (400).

CDS measure the risk of insuring against risk of default for companies or countries.