An indicator of sovereign risk

Certain EU officials have been vocal in their criticism of the sovereign credit default swap market for its supposed contribution to a rise in borrowing costs for some European countries. However, analysis from Hungary’s central bank suggests CDS spreads provide more accurate information on Hungarian sovereign credit risk than bond yields.

The sovereign credit default swap market has come under scrutiny from regulators across Europe in the wake of the Eurozone debt crisis. Some politicians accused speculators of using it to push spreads wider and reap quick profits – a trend they believe exacerbated the problems faced by some European countries.

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So far, however, there have been few studies devoted explicitly to the functioning of the sovereign CDS market