This weekend we saw an important action in the downgrade of Saudi Arabia [6], highlighting just how far the EM crisis has carried. As Ice Farm Capital's Michael Green notes, in response, Saudi CDS continues to climb, reaching its highest since 2009 (amid both default risk and devaluation concerns).
[7]
Now clearly Saudi’s distress is largely a byproduct of oil weakness. I create an “adjusted” Saudi CDS by netting out Germany and as you would expect this fairly closely tracks oil prices:
[8]
But this is what is perhaps concerning – because even with oil prices undercutting the 2009 lows, Saudi adjusted CDS remains well below the levels briefly achieved in that period.
Combined with the additional risks of a war in Yemen, Saudi succession challenges (which we have highlighted previously) and the emergence of ISIS, it’s perhaps surprising that the world’s view of Saudi Arabia has not deteriorated even more. As discussed in the weekly, the Emerging Market pain trade seems to be a fairly direct outcome of the European desire to weaken its currency to capture global growth.
With Draghi continuing to push, and Yellen still not acting to turn the US into the extreme global consumer by strengthening the dollar, the rising risks in Saudi Arabia are a reminder that growth weakness has its own feedback mechanism – if oil prices stay at these levels for an extended period of time, it appears unlikely that Saudi Arabia will remain the reliable source that the world is currently counting on.
Source: Ice Farm Capital
