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Sovereign risk is key structured issue

Jubilee Financial Products says the credit rating of a structured product issuer should be less of a consideration for advisers than the government that backs the bank.

Chief executive Adam Habib says there is a very close correlation between banking credit default swap levels and sovereign guarantor CDS and suggests the credit risk of an issuer is only relevant at a sovereign level.

According to Jubilee, the correlation of most European banks to their respective sovereign guarantor ranges from 0.75 up to almost 0.95 in the case of Bank of Ireland and the Irish state.

Habib says: “Rather than asking, is it S&P AA-rated, IFAs should ask, is this bank key to the geographical region and if it goes bust, does that mean the region will go bust with it? This is how the markets are trading, the rating agencies have been left so far behind they are laughably irrelevant.”

Lowes Financial Management managing director Ian Lowes says: “If you end up with a sovereign guarantor on an institution, the depositors with the bank might be protected but that does not mean all investors are.

“If all retail investors are protected but commercial investors are not, then medium-term notes go down.”

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