The cost of protection against defaults in Asian debt soared to record highs on Friday amid fears the financial crisis could soon spread to the region, especially to countries such as Indonesia and South Korea. The widening spreads in regional credit default swaps comes despite government efforts to inject liquidity, as these measures are overtaken by fears of a global recession that is ripping through stock markets world-wide.
The worsening tone in Asian credit markets also reflect concerns about political instability and policy responses in the region, sparking some reminders of the financial crisis that swept the region a decade ago, analysts said.
"There's a general consensus that Asia is in better shape. But that doesn't mean it won't be affected. Clearly once American consumers start to scale back and then in Europe, that's going to affect Asia," said Adil Chaudhry, head of regional credit markets for Scotiabank in Singapore.
The iTRAXX Asia ex-Japan high-yield index, a key measure of risk aversion for the region's "junk"-rated credit, soared by about 90 basis points to a record 890/940 bps. The equivalent investment-grade index widened by 40-50 basis points to 318/338. Asian CDS spreads have now widened well beyond benchmark levels in the United States and Europe, where the Markit iTraxx Crossover index, a measure of European high-yield credit spreads, was trading at around 665 bps.
South Korea's five-year CDS widened by 30-40 basis points to about 345, continuing to trade at record levels. That means an investor would need to pay $345,000 annually to insure against a default in $10 million of the country's underlying debt. At the end of 2007, the cost was only $40,000. Indonesia's five-year CDS surged to as high as 725 basis points at one point, from 600 basis point early on Friday.
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