Polish Risk Assesment Using Traditional Economic Measures and Sovereign Credit Default Swap Premiums - a Comparison

Abstract

Sovereign Credit Default Swap premia are interpreted as a measure of risk in a country. At the beginning of the financial crisis, aft er the collapse of Lehman Brothers, there was a sharp increase in the CDS premia issued to European countries - including Poland, even though there was no corresponding economic collapse or banking crisis. Research has shown that sCDS premia are susceptible to the spread of risk both in a region and from developed economies. In this article the author tries to determine to what extent premium changes are a refl ection of Polish fundamentals regarding the size or dynamics of certain segments of the Polish fi nancial market. Th e period covered was from 2008 to 2011. Based upon the results of the study we conclude that changes in the sCDS premium are indeed linked to some degree with changes in government debt, especially foreign; as well as with changes in imports and exports. In addition, a link was demonstrated regarding the bond market (low risk) and the WIG20 index (average risk); though small for fi nancial instruments with the highest risk (NC index). However, one can also suspect that there exists a kind of feedback relationship between changes in the CDS premium and investors' expectations, which could explain the growth of the premium during fi nancial turbulence in other European markets.