HONG KONG, Aug 19: Pakistan’s sovereign bond spreads stayed high on Tuesday after the resignation of president Pervez Musharraf failed to clear doubts whether the government will now tackle its urgent political and economic problems.

Despite the rally in Pakistan’s stocks, credit analysts warned the country has yet to convincingly show it will deal with a host of economic problems, including its deteriorating fiscal position, slowing economic growth and double digit inflation.

The country also faces continued political uncertainties such as who will replace Musharraf and how the coalition government will deal with a Taliban insurgency.

Pakistan’s five-year credit default swaps (CDS) were bid at 700 basis points, little changed following Musharraf’s resignation on Monday.

Investors would thus need to pay $700,000 annually for protection against a default in $10 million of the country’s underlying debt. “We do not think the political issues are all resolved — the key question remains how well the two major coalition partners ... can cooperate without conflict, and focus on turning around the economy,” said Lehman Brothers in a note to clients.

“We still see substantial risk of political turmoil dominating the more pressing economic issues. In addition, concerns over a potential deterioration in the security situation remain in place as well.” Spreads on Pakistan sovereign bonds, which are not widely traded, have widened more than 2 percentage points this year as the political and economic turbulence has spurred ratings downgrades by Standard & Poor’s and Moody’s.

Few investors expect Pakistan to fulfil its intention of selling a sovereign bond anytime soon, though the country is moving ahead with plans for its first local currency Islamic bond, or sukuk, sale in September.

Pakistan is the latest potential headache for Asian credit investors, which are dealing with slowing regional economic growth and global financial sector woes, though the recent slump in oil prices has at least eased some of the inflation concerns.

Key measures of risk aversion in the region widened on Tuesday after business publication Barron’s said US officials may have no choice but to effectively nationalise US home finance providers Fannie Mae and Freddie Mac.

Such a move could lead to losses among the firms’ shareholders and buyers of its subordinated debt, while raising concerns about the US government’s own finances and the confidence in the overall US financial sector.

The iTRAXX Asia ex-Japan high-yield index widened by 5 basis points (bps) to around 545 basis points, while the equivalent investment-grade index moved out 2-3 bps to 143.---Reuters