Food Fight: Economic Interconnectedness & The First Law of Ecology

“When we try to pick out anything by itself we find it hitched to everything else in the universe.” — John Muir

In the aftermath of Russia’s unprovoked invasion of Ukraine, CDS spreads on Egyptian government bonds blew out. That’s because Egypt is a large importer of wheat. Below, a look at economic interconnectedness and the first law of ecology.

LIBORing

Finance is full of intimidating acronyms: LIBOR, EBITDA, WACC.

LOL.

Another acronym is CDS, short for credit default swap. A CDS is like an insurance policy for bondholders, protecting against default risk. One counter-party is buying credit protection while the other is selling it. The buyer pays the seller a premium (or spread). If there’s a default, the seller makes the buyer whole. If not, the seller pockets the premium.

Source: Market Business News, Credit default swap — definition and meaning.

The riskier the asset, the more expensive buying protection is. For example, the spread on JP Morgan will be lower than the spread on Russia’s sanctioned Sberbank. Changes in CDS spreads are a barometer of risk assessment. Increasing spreads imply that investors think the risk of default is increasing.

In early March, CDS spreads on Egyptian government bonds went parabolic, an unintended casualty of…