Macquarie, Barclays Recommend Buying Thai Default Swaps on Coup

Macquarie Group Ltd. and Barclays Plc recommend buying Thai credit-default swaps as yesterday’s coup will push up the cost of the contracts and heighten the risk of a ratings downgrade.

The five-year swaps that insure Thai government debt against default jumped six basis points yesterday, the biggest increase since Feb. 24, to 133, after the military seized power, according to CMA. They fell to 127 as of 12:19 p.m. in Hong Kong, prices from Standard Chartered Plc show.

“Around 150 would be more logical from here” within a month, Nizam Idris, the Singapore-based head of strategy for fixed income and currencies at Macquarie, Australia’s biggest investment bank, said in an interview today. “Especially if rating agencies issue warnings on the potential impact of political uncertainties on its rating.”

Thailand’s economy unexpectedly shrank in the first quarter from a year earlier, data showed May 19, after protests that began in late October hurt spending and investment. Army Chief Prayuth Chan-Ocha said on national television late yesterday afternoon that he was seizing control to restore peace after he detained leaders of rival political groups. That followed the imposition of martial law on May 20.

Barclays, the U.K.’s second-biggest lender, recommends buying Thai default swaps versus similar Malaysian contracts, according to a note to clients released yesterday. The premium investors must pay to buy the Thai contracts over the Malaysian ones will widen to 40 to 50 basis points from around 30 basis points, Barclays said.

‘Credit Negative’

Moody’s Investors Service, Standard & Poor’s and Fitch Ratings all rank Thailand at the third-lowest investment grade. The imposition of martial law was “credit negative” and will further damp economic growth,’’ Moody’s said in a note yesterday.

The rift between the largely rural-based support for former Prime Minister Thaksin Shinawatra, who was ousted in a 2006 coup, and his royalist opponents has polarized Thai society and weighed on production and tourism.

“Violence didn’t end after the 2006 coup,” Macquarie’s Idris said. “There was the Bangkok bombing on January 2007 under military rule. And at that time the red and yellow shirts are less organized than today,” he said, referring to the supporters and opponents of Thaksin.

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