Fitch Solutions says CDS market uncertainty surrounding the results of upcoming European bank stress tests has led to increased CDS liquidity during the last month for banks in Portugal, Italy, Greece and Spain.
“CDS liquidity for banks in Portugal has, on average, moved up seven regional percentile rankings in the last month, with Italian, Greek and Spanish banks also moving up five, four and three percentiles, respectively,” said Jonathan Di Giambattista, managing director, Fitch Solutions, New York.
The five European banks for which CDS liquidity increased most over the month to 1 April were: EFG Eurobank Ergasias S.A., Intesa Sanpaolo Spa, KBC Bank NV, Caja de Ahorros de Valencia, Castellon y Alicante and Banco Popolare Societa Cooperativa.
Overall, global CDS liquidity has remained relatively stable in the past two weeks since Fitch’s last liquidity commentary, with the global CDS liquidity index closing at 9.55 last Friday compared to 9.61 two weeks previously.
In general, the liquidity of a credit derivative asset increases when it is showing signs of financial stress in combination with a significant amount of debt outstanding and/or changes in its capital structure, including new issuance. The liquidity scores of assets have historically traded between 4 at the most liquid end, through to 29 at the least liquid end. Entities also tend to be more liquid when there is agreement about present value but disagreement about future value due to heightened uncertainty surrounding the entity.
