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Saudi Arabia debt insurance costs jump as Iran relations sour

Five-year credit default swaps for Saudi Arabia rose 25 basis points

LONDON, Jan 4 (Reuters) – The cost of insuring exposure to Saudi Arabian debt rose on Monday to the highest level since at least 2010 after relations with Iran deteriorated at the weekend.

Saudi Arabia cut ties with Iran on Sunday, responding to the storming of its embassy in Tehran which had come after Riyadh’s execution of a Shi’ite Muslim cleric.

Data from Markit showed that five-year credit default swaps (CDS) for Saudi Arabia rose 25 basis points (bps) on the day to 175 basis points, the highest since at least 2010.

Earlier, one-year dollar/Saudi riyal forwards, which rise when the pegged currency is viewed as being under pressure, jumped to 680 points leaving them near a 16-year high hit at the end of December.

Saudi assets have come under increasing strain as oil prices languish around the $38 a barrel mark. Saudi’s Budget for 2016 included a host of spending cuts and reforms to energy subsidies in an attempt to reduce the deficit.

“There is a strong fear of a depegging of the riyal, and these fears have increased with the decline of oil prices,” said Guillaume Tresca, senior emerging markets strategist at Credit Agricole. “The market is pricing in a depreciation of about 3 to 4 percent.” (Reporting by Claire Milhench; editing by Marc Jones)