İtobiad (Dec 2023)
The Relationship Between Credit Default Swap (Cds), Central Government External Debt Stock, and the Current Account Deficit in Türkiye
Abstract
Debt ratios are often a static indicator of the borrowing situation in an economy. Since the debt burden, interest burden, or ratio to the national income of an economy shows the current situation, it does not provide health information for the future. Dynamic indicators are needed to understand potential debt relationships in the future. CDS spreads, which are based on a swap transaction and gained importance after the global crisis, have recently been used as a dynamic debt ratio. There are basically two reasons for this situation. The first reason is that static analyses are considered insufficient by market participants. The other reason is that CDS spreads clearly reveal the risk cost for the lender. The reason for the current account deficit and external borrowing can be sometimes the increased need for foreign exchange in a country. When considering foreign exchange and interest rate swaps within this framework, the relationship between the current account deficit and CDS spreads becomes more pronounced. This is because, among the reasons for foreign exchange inflows and outflows, there are factors such as foreign trade transactions, external borrowing, and swap transactions. The study analyzed the variables of central government external debt stock, current account deficit, and CDS spreads using wavelet coherence analysis in the R Studio program for the period of 2008:1-2023:3. The main reason for choosing this analysis method is that it obtains findings for the entire time period included in the analysis and increases the data set to very high dimensions with simulation. This characteristic of the analysis enhances the validity level of the findings. The study found no relationship between the central government external debt stock and CDS spreads in Türkiye, except for the two years following the 2008 global financial crisis. Additionally, a positive relationship was identified between the current account deficit and CDS spreads. These findings indicate that in Türkiye, the current account deficit has a greater impact on CDS spreads compared to the components of CDS spreads.
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