last time using Bloomberg I found out that the CDS Spread for Italy 5Y CDS in USD was somewhere around 230bp whereas the Spread for Italy 5Y CDS in EUR was just around 130bp. I looked at other debtors (e.g. corporates). The phaenomenon stayed the same. What is the reason behind that? If a company defaults it defaults in all debt.

  • $\begingroup$ read this FT article: Quanto CDS, the widow-maker, it should spread some light on things for you. $\endgroup$ – will Jul 29 '18 at 21:15

Firstly, have a look at this TwoSigma article:
What Sovereign CDS Spreads Potentially Tell Us about Currency Risk

To elaborate, if a country in the Euro Zone (like Italy) defaults, then this will clearly have an effect on the EUR as a whole, i.e. the EUR will weaken. So if you are insuring against Italy defaulting you really don't want your insurance premium to be paid out in EUR. Instead people prefer to have it paid out in a currency that has a lower correlation to Italy's default, such as USD.

The rest is supply and demand, that is, higher demand for the USD-denominated CDS contract will drive its spread up.


For that you might separate the question for two types of CDS :

1- Quanto CDS where the reference obligation is in a different currency. For that, you've had excellent answers.

2- CDS where the reference obligation currency is the same as the CDS currency but different from the domestic currency of the issuer. For this here my contribution :

One of the reasons is that an obligor can default on one currency and not on the others. For that I have two examples :

1- Argentina : the country has defaulted lately on its USD bonds (or have been forced to technically default by US court & FED) but not on other currencies.

Think about argentina debt in pesos. Politicians might, at some extent, make pressure on central bank to buy the argentina debt, but they can never have leverage on the Fed.

2- In 2010, a French bank named "Société Générale" was unable to find liquidity in USD to pay its obligations while the bank had enough money to pay the debt in EUR (due to USD scarcity at that time in european markets).

The ECB has interveend to swap EUR into USD with Fed avoiding Société Générale default.


For a corporate who has its revenues in 2 currencies at least, it will be able to pay its obligations in the two currencies if the revenues on both currencies stay stable. If not, both revenues must compensate and the liquidity to swap currencies stays correct. Hence all in all the CDS spread contains information about the corporate credit wothiness in a currency and also the cross currency spreads.


Thank you for your answers! I have found a currently published paper that analyses this explicit case: https://arxiv.org/abs/1512.07256

Conclusions and Further Work

We analysed default–driven FX devaluation jumps as a modelling mechanism. These can be used to explain the basis in credit default swaps offering protection on the same entity but in different currencies. We studied the case of Italy and EUR vs USD protection in particular. We found that the jump mechanism allows one to explain the size of the basis, whereas pure shock correlation between FX rates and credit spread is not sufficient. Further applications we may consider in future work include wrong–way risk modelling in credit valuation adjustment (CVA) applications.

  • $\begingroup$ I've checked on mark-it if the refOb were in USD and it is the case. So it is not a question of quanto here. On which bbg screen did you found EUR CDS prices? I don't find such CDS in mark-it nor on Bloomberg. Which may indicate that the market thinks its worthless. $\endgroup$ – Jiem Aug 2 '18 at 7:28
  • $\begingroup$ You right. I've checked that. I couldn't find any ITALY EUR CDS quotes either. I probably looked wrong. $\endgroup$ – DataAdventurer Aug 3 '18 at 8:14

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