The ratcheting up of political tensions between Saudi Arabia and Iran lifted Saudi Arabia’smarket-based measures of sovereign credit risk. Saudi Arabia’s five-year Sovereign EDF?(Expected Default Frequency) metric1, which measures the probability that the governmentwill default on a bond during the next five years, spiked from 0.31% to 0.42% over the pastweek (see Exhibit 1). In addition, the increase in the country’s sovereign credit risk sentimentover the past week was the largest among the 14 sovereign entities that we track in theMiddle East region. The spread on Saudi’s five-year CDS contract, which is the primary driverof the five-year sovereign EDF, rose to 104 bp on November 10.    The rise of Saudi Arabia’s Sovereign EDF followed an event-packed week, which startedwith the announcement of Saudi Arabia’s King Salman detaining dozens of princes andformer ministers in a new anti-corruption probe. This was followed by the flare up intension between Saudi Arabia and Iran. Saudi Prince Mansour bin Muqrin and a number ofgovernment officials were killed on Sunday in a helicopter crash near the border with Yemen,a day after the kingdom intercepted a ballistic missile that was said to Iran. As a result, Saudiminister of foreign affairs called for sanctions on Iran for “its support of terrorism and forviolating the ballistic missile resolutions of the United Nations.”Lebanon's Prime Minister Saad Hariri, a long-term ally of Saudi Arabia, surprised the globalmarkets by resigning on November 4, citing assassination threats and blaming Iran forinterference in Lebanon. On Thursday, Saudi Arabia warned its citizens against travelling toLebanon and told those in the country to leave as soon as possible. Lebanon’s Sovereign EDFrecorded the second largest weekly increase, from 2.7% to 3.2%. If we convert the country’sSovereign EDF to a market-implied rating, it now sits at B2. This metric is more or less in linewith its Moody’s Investors Service agency rating of B3.

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