Thai CDS spreads blow out on military coup

A political crisis in Thailand has rattled Asian markets, causing spreads on credit default swaps (CDSs) on Thai sovereign bonds to blow out to over 50 basis points on Wednesday from 36bp a day earlier.

Asian markets woke up to shocking headlines of a military coup in Thailand against prime minister Thaksin Shinawatra, while he was away in New York. Army tanks had reportedly surrounded Thaksin’s office in Bangkok, while the military also seized control of television stations. An announcement on national television made on behalf of army commander-in-chief General Sondhi Boonyaratkalin said martial law had been declared across the country, and that a Council of Administration Reform with King Bhumibol Adulyadej as head of state had seized power without resistance.

The news caused the Thai baht to weaken overnight to 37.8 baht against the US dollar from 37.3 earlier on Tuesday. The Thai stock exchange was ordered shut by the military. The benchmark stock exchange of Thailand index closed at 702.56 points on Tuesday.

Thaksin, who was in New York attending the United Nations General Assembly when the news broke at about 1745GST on Tuesday, has declared a state of emergency. Meanwhile, the army announced that an election will be held next month.

Meanwhile, analysts generally remain upbeat about the country’s economic outlook and most expect a peaceful resolution to the situation in the coming weeks. Sin Beng Ong, vice-president, sovereign strategist and economist at JP Morgan in Singapore, says: “The CDS has widened significantly to 50bp, up from 36bp in Asia time. At these current levels, we would be inclined to sell the CDS at 50bp and take profit at 40bp, stop loss at 55bp, taking the view that the military will acquiesce to the king and allow elections to proceed without the likely participation of Thaksin.”

Glenn Maguire, Asian economist at Société Générale in Hong Kong, says: “Though the baht is likely to weaken, we do not anticipate a run on the currency and note that Thailand, like many other Asian economies, has particularly large levels of foreign exchange reserves, which can be used to cushion any capital outflow.”

Ratings agencies Standard & Poor’s and Moody’s Investors Service warned that Thailand’s debt ratings may be cut, although Moody’s noted that it sees no “immediate risk of an external payment crisis".