Cost of Protecting Japanese Government Debt Hits Record High
February 18th, 2009Via: Reuters:
The cost of protecting Japanese government debt against default has risen sharply as political uncertainty and worries about the nation’s fiscal position grew after data this week highlighted the depth of recession in the world’s second-biggest economy.
Five-year credit default swaps on Japanese sovereign debt climbed to a record 130 basis points on Wednesday, equivalent to a cost of $130,000 a year to protect $10 million of debt, traders said.
The rate is triple the level of 43 basis points traded in late January.
“The recession is very deep, and uncertainty about the political situation may continue to support this widening trend,” a fund manager at a Japanese asset management firm said.
But traders say the market is quite illiquid and dominated by foreign investors such as hedge funds.
Japanese players do not believe the government would default on its debt and seldom buy protection for their holdings of Japanese sovereign bonds.
“What overseas investors are concerned about is Japan’s very high ratio of public debt to gross domestic product,” said Koei Takahashi, a senior credit analyst at Nomura Securities.
Japan’s public borrowing amounts to nearly 800 trillion yen ($8,679 billion), about 1.5 times its GDP.
Japan’s economy shrank 3.3 percent in the final three months of 2008, its worst quarterly contraction since the 1970s, dragged down by a reliance on exports and by soft domestic demand.
Another factor making overseas players nervous is political uncertainty. Shoichi Nakagawa resigned as finance minister on Tuesday after being forced to deny he was drunk at a Group of Seven news conference last weekend.
Research Credit: JW
