The lack of transparency in the credit defaults swaps market has been a cause for concern in Ukraine, where the cost of insuring bonds against default rocketed to astronomical levels this year, writes David Oakley .

Ukraine's sovereign CDS price surged to a record 5,383 basis points on March 5 - extremely high, even accounting for the country's dire economic outlook. Argentina, which has a much weaker economy, has never had such high levels.

The cost of insuring Ukraine debt rose sharply from about 3,000bp at the start of February, leading to speculation at the time that the price jump would benefit some of the banks because they had large short positions through buying CDS contracts at much lower levels.

Investors speculate that one bank thought to have hedged itself by buying Ukraine's CDSs was Morgan Stanley, which had also pulled a loan for Ukravtodor, Ukraine's public road fund, in early February.

Morgan Stanley would not comment on its trading positions but the bank stresses that it would not go short on a borrower deliberately in the hope that it would default.

The bank said it pulled the Ukravtodor loan because covenants were triggered when Ukraine's sovereign ratings were downgraded as its outlook deteriorated.

Lack of liquidity in the market was also responsible for pushing prices artificially high, something that has affected the sovereign CDS prices of industrialised countries such as Austria and the UK. The cost to protect their debt shot up at about the same time as Ukraine, although to nothing like the same extent.

Austria's CDSs hit a record 268bp in early March - almost double the levels of a month earlier, while UK prices rose to record highs of 164bp in mid-February - again almost double the levels of a month earlier.

These prices seemed artificially high considering neither country was ever likely to default on its debt.

However, in spite of the lack of liquidity and transparency, most analysts still believe CDS prices are useful and relevant.

Meyrick Chapman, fixed income strategist at UBS, says: "Credit default swaps can be a good measure of risk. CDS may not be that liquid among the sovereigns, but it is still a fairly useful measure of risk."

He says investors often speculate about unusual market moves when they have been on the wrong side of a trade. "It has been known for investors to claim market manipulation when they lose money - and that can happen in any market."

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