Pakistan is Now Over 92% More Likely to Default on its Debt

The possibility that Pakistan would not be able to pay its debt has increased to terrifying new heights, and the cost of “insuring” the nation’s sovereign debt has also increased dramatically and horribly.

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Arif Habib Limited (AHL) figures show that on November 18, Pakistan’s benchmark 5-year Credit Default Swap (CDS) increased by a staggering 1,253 basis points to 92.53 percent. Investors are unable to assume Pakistan’s default risk at a price level below 92 percent, as seen by the instrument’s increase in the spread of more than 12.53 percentage points in a single day.

Pakistan is Now Over 92% More Likely to Default on its Debt

The increase is tied to the State Bank of Pakistan’s (SBP) falling foreign exchange reserves, which, according to information made public last week, were less than $8 billion as of November 11, 2022.

Dar said on Saturday that Pakistan would not ask for a delay in the payment of a $1 billion Sukuk bond due in December, dispelling worries of an impending default. He argued that Pakistan has never seen a small-amount default other than in 1971 and that the future bond will be paid in full right away.

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Along with it, he criticized his political rivals for allegedly manipulating Pakistan’s perceived default risk index. He asserted that for the good of the nation, it was necessary to ignore the political motivation behind the speculations regarding the CDS. Money markets are interpreting the marker differently than the minister, who said that it has no significance and that international bonds are a relatively tiny instrument.

Relevantly, Moody’s and Fitch both lowered Pakistan’s issuer and senior unsecured debt ratings from B3 to Caa1, while Fitch lowered Pakistan’s long-term issuer default rating from B- to CCC+. Both listed diminishing reserves along with liquidity issues in the wake of catastrophic floods as primary reasons for their downgrades.

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