Never mind the reason why – watch what the market says

The current situation in Egypt is one that is creating a great degree of interest and speculation as to what the wider implications may be for the country, the region and indeed for the wider world. What none of us should forget is to watch which way the money is flowing to get an idea of where potential troubles could lie.

As the name implies, a Credit Default Swap (CDS) acts as a means of insuring debt holders against issuer default. This means that the more people are willing to pay for it the more risk the market sees for default.

Take a look at the chart below:

As you can see it was in early January that the CDS market in Egypt began to move quickly upward. This makes it clear that those who were at risk (debt holders) believed that they needed more insurance for the lending and were willing to pay more for it.

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