HONG KONG, Sept 4: Pakistan will probably avoid the sovereign debt default that markets increasingly expect, even though the country faces more downgrades to its credit rating as it grapples with dwindling reserves and a sliding currency.

The stability of Pakistan, a key US ally in the war on terrorism, is so important a geopolitical factor that institutions such as the International Monetary Fund will eventually help it meet obligations to creditors, analysts said.

“Is this going to get into a default scenario? No,” said Dilip Shahani, Asia-Pacific research head at HSBC.

“Negotiations with the likes of IMF will help stabilise the situation,” he said.

Investors are not so sure. Pakistan’s credit default swaps--contracts investors use to insure debt -- have been widening since the departure last month of president Musharraf.

The five-year credit default swaps have jumped 200 basis points to 900/1,000 basis points since Musharraf quit on Aug 18. That means it now costs at least $900,000 to insure $10 million worth of debt against default, compared with around $700,000 at the end of the Musharraf era.

It is now cheaper to insure five-year bonds of Argentina, which has been in default since a 2001-02 economic crisis.

Argentina’s 5-year credit default swaps are at 780-800 basis points.

Pakistan’s credit default swap numbers implied “a significant risk of sovereign default” in the run up to the maturity of Pakistan’s $500 million bond in February, Citigroup economist Mushtaq Khan said. He, too, did not think a default would occur. Investors do have reasons to be concerned.

DECLINING RESERVES: The political chaos has raised questions about whether the government will be able to tackle the country’s many economic problems. “It seems the government is not getting its act together, making it difficult to actively address the decline in the forex reserves,” said Yang-Myung Hong, sovereign rating analyst at Lehman Brothers.