News and Finance

Asia is “relatively risk free” from contagion amid deteriorating confidence in Europe’s sovereign debt because its economies have stronger fiscal positions, CIMB Investment Bank Bhd. said.

Asian governments mainly use domestic markets to fund their deficits and debt levels are still manageable and within sustainable limits, CIMB economists, led by Lee Heng Guie, wrote in a report today. The recent increase in Asian credit-default swaps is temporary, said the analysts from Malaysia’s second- largest banking group.

Investors’ concern that Greece, Portugal and Spain are facing difficulty financing budget deficits pushed credit- default swaps on the debt of all three countries to record highs last week. Moody’s Investors Service Inc. said Feb. 2 the U.S. government’s bond rating will come under pressure unless additional measures are taken to reduce its budget deficits.

“Fears of sovereign-debt contagion spreading to Asia are buffered by Asia’s strong economic and financial fundamentals,” CIMB said. “Given Asia’s well managed financial prudence as well as sound macroeconomic management, we do not expect international rating agencies to flash their concerns on potential sovereign debt risk in the region.”

Budget deficits in Greece, Ireland and Spain widened to more than 12 percent of gross domestic product last year, compared with 2.5 percent in Indonesia, 4.1 percent in Thailand, 7.4 percent in Malaysia and 7.6 percent in India, CIMB said, citing International Monetary Fund, World Bank and its own estimates.

Credit-Default Swaps

The cost of protecting Asia Pacific corporate and sovereign bonds from default declined today, according to traders of credit-default swaps. Credit-default swap indexes are benchmarks for protecting bonds against default and traders use them to speculate on credit quality. An increase suggests deteriorating perceptions of creditworthiness and a drop shows improvement.

The Markit iTraxx Asia index of 50 investment-grade borrowers outside Japan dropped 2.5 basis points to 126.5 basis points as of 9:13 a.m. in Singapore, according to Citigroup Inc. The index surged to 127.1 basis points on Feb. 5, the highest since the new series started trading on Sept. 21, 2009, according to CMA DataVision prices in New York.

The sovereign debt ratings of countries in the Asia-Pacific region are unlikely to be cut this year as rebounding global demand for exports and fiscal stimulus spur domestic growth, Moody’s said in a report last month. The region’s “robust” growth potential means most countries, excluding Japan, have begun or will start winding down expansionary monetary and fiscal policies, it said.

Current Accounts

In Southeast Asia, the proportion of public debt to GDP for Malaysia, Thailand, Indonesia and the Philippines are manageable and not approaching their debt sustainability limits, CIMB said.

“These economies still enjoy healthy current-account surpluses while their budget deficits are projected to narrow in the medium term,” the analysts wrote. “Other fiscal and external stability indicators such as foreign reserves, domestic savings, external debt and net interest payments to revenue also support the underlying sustainability of fiscal debt management.”

The Philippines will likely proceed with its plan to sell about $500 million worth of 10-year, yen-denominated bonds later this month and the plan is unaffected by concern over Greece’s sovereign debt, Treasurer Roberto Tan said today.

Heed Warning

Rising credit-default swaps show Greece is struggling to persuade financial markets it can restrain the European Union’s largest budget shortfall without outside assistance. Moody’s, Standard & Poor’s and Fitch Ratings cut the country’s credit grade in December. Borrowing costs are also rising for Portugal and Spain.

Japan’s government must heed the warning on soaring debt loads stemming from the turmoil of Greece’s credit-rating downgrade, and concerns about the credit quality of some European countries shouldn’t be regarded as “a burning house on the other side of the river,” Bank of Japan board member Seiji Nakamura said Feb. 4.

Source