How to Tell Which Country is Economically Stronger ?

 4 July 2022

People always like to compare country by country,  especially when those countries are their favourite.  Some compare them in terms of military strength;  some,  in terms of wealth and others,  in terms of economic strength.  Many a time,  the argument always ended up souring the relationship among the friends and relatives and sometimes,  among the family members.  

This article will suggest a more rational approach to comparing the economic strength and market condition of various countries. 

How?

By comparing the 5 Years Credit Default Swaps (CDS) of the countries.  If a country's CDS value is higher than the other,  it is likely the country is economically weaker than the other country.

Why?

CDS is a financial derivative that bond buyers will usually buy to offset the credit risk of buying a large quantity of a bonds.  Buying CDS is like buying an "insurance policy".   The buyers will pay a premium that will ensure that the buyers would be reimbursed in case there is a bond default.  If the bond buyer is borrowing the money from the banks to buy the bonds,  the banks might have a condition for the borrower to buy CDS before the banks give out the loan.       

Who sets the CDS Value?

A derivative is simply a financial contract between two parties,  in this case,  the buyer and the "insurer" for the swap of the credit risk of purchasing the bonds.  Credit default swaps are traded over-the-counter (OTC).  Their trading methods are non-standardized and the prices or values are not verified by an exchange.   The "World Government Bonds" webpage keeps track of some of the countries' CDS values as shown attached.

 (Doubleclick to go to the Webpage)

How to interpret?

The table has the following interpretations.  It shows not only the country credit ratings,  the 5-year CDS but also the % changes in the last 1 month and 6 months.  The important figure is the Probability of Default (PD) which is worked out based on a 40% recovery rate.

Other Information

If one were to click the country in the table,  one will be shown the following page which gives not only the details but also a comprehensive chart showing how the CDS values moved in the last 2 years. In the case of Russia,  one can see that the CDS value has risen from a low of near-zero to 12,500 in less than 6 months.  

Conclusion

The information provided in the table could be used to work out the premium for the CDS of buying Government bonds.   The table could be used also to compare the current economy and market conditions between countries.

Lastest 5-Year CDS Quotation

Please refer to this World Government Bond Website.

Disclaimer:  This article is for information and educational purposes.   Readers are advised to conduct their own research and study to make their own investment decisions.