Sovereign Risk in Visegrad Countries

CMA, a credit information specialist, releases a quarterly Global Sovereign Credit Risk Report. In 2009Q4, the V4 countries were perceived as relatively safe within the Central European region. CDS spreads, which are counted implied probabilties of a country's sovereign default, are fairly low in the Visegrad countries.

The least country risk lies in Slovakia, barely above the level of Slovenia and most Western European countries which are also in the euro-zone. Although the Czech Republic is not a euro-zone member, it is just slightly above the level of Slovakia. You can hedge these country risks well below 100 bps, which is not much higher than in safe Western European economies. Poland is just slightly above the 100 bps level. Hungary is in the middle-group, almost at par with Croatia around 200 bps.

In the wider Central European region one can find some of the ten riskiest countries from a government bankruptcy point of view: Lativa, Lithuania in the Baltics and Romania near Hungary are all in the top 10 riskiest national economies.

Why investors watch CDS spreads? Even if you do not hold government liabilities in a country, you might not be able to liquidate your investment in case of a government default. When a government defaults, it becomes almost impossible to trade with its currency or exchange it to dollars or euros. Usually governments in default tend to nationalize foreign assets. If you invest into a country where the government defaults, you may have a difficulty in regaining at least a part or all of your initial investment. However, such default is very unlikely within the EU and the Visegrad countries are currently look rather safe.