HONG KONG: Pakistan will probably avoid the sovereign debt default that markets increasingly expect, even though the country faces more downgrades to its credit rating as it grapples with dwindling reserves and a sliding currency.
The stability of Pakistan, a key US ally in the war on terrorism, is so important a geopolitical factor that institutions such as the International Monetary Fund will eventually help it meet obligations to creditors, analysts said.
“Is this going to get into a default scenario? No,” said Dilip Shahani, Asia-Pacific research head at HSBC.
“Negotiations with the likes of IMF will help stabilize the situation,” he said. Investors are not so sure. Pakistan’s credit default swaps — contracts investors use to insure debt — have been widening since the departure last month of President Pervez Musharraf.
The five-year credit default swaps have jumped 200 basis points to 900/1,000 basis points since Musharraf quit on Aug. 18. That means it now costs at least $900,000 to insure $10 million worth of debt against default, compared with around $700,000 at the end of the Musharraf era.
It is now cheaper to insure five-year bonds of Argentina, which has been in default since a 2001-2002 economic crisis. Argentina’s 5-year credit default swaps are at 780/800 basis points.
Pakistan’s credit default swap numbers implied “a significant risk of sovereign default” in the runup to the maturity of Pakistan’s $500 million bond in February, Citigroup economist Mushtaq Khan said. He too did not think a default would occur.
“It seems the government is not getting its act together, making it difficult to actively address the decline in the forex reserves,” said Yang-Myung Hong, sovereign rating analyst at Lehman Brothers. Currency reserves have shrunk to $9.38 billion from a record high of $16.5 billion ten months ago, the current account deficit is at 8.4 percent of gross domestic product and the rupee is at a record low.
