CDS spike points to something fishy

Beep, beep! Beep, beep! The insurance premium on Pakistans sovereign bond has suddenly started blinking on the screens of international and local bond watchers. According to CMA - a London-based credit information provider - Pakistan was fourth on the list of high default probabilities, a level unachieved in many months.
Fancily called the Credit Default Swap (CDS), the premium shot up by more than 70 basis points in a matter of two days, from 763.26 bps on Tuesday to 835.20 bps on Thursdays early trade. The move, which comes after seven months of virtually stagnant behaviour, reflects changing investor perceptions about Pakistans economy.
The spike, however, was not confined to Pakistan. With China planning to tighten its fiscal and monetary policies to curb inflationary pressures, sovereign papers of various emerging economies have taken a hit as well.
This is because tightening in China could clip its demand for global assets, and dent the expectations of global recovery - implying a downside risk in commodity prices worldwide. But since that would have a positive externality for Pakistan by lowering its import bill and consequent inflation, there could be more reasons why Pakistans CDS followed that of emerging markets with a lag.
Strangely though, this spike comes right after the thud on FoDPs recent moot, almost just as the 1000-bps fall in May 2009 had coincided with the formation of the forum. While this warrants some attention, shifting regional geo-political dynamics also raise some concerns.
In addition to the tilting of American policy towards economic and political development in the so-called Af-Pak region, U.S president Barrack Obama recently announced his plans to increase the number of troops in Afghanistan by 30,000.
This, coupled with Indias diplomatic suasion to discourage USAs help to Pakistan Army has darkened the shades of regional political clouds, in the backdrop of Mumbai attacks. Moreover, the debate in U.S Congress, that war-on-terror related military reimbursements to Pakistan should be withheld on the premise that its now Pakistans war as acknowledged by the government.
These, in turn, have serious economic implications for Pakistan as it has kept the friends forum cold, while holding back the US Coalition Support Fund, and other foreign inflows to the tune of $1.8 billion, for more than nine months.
Then, of course, there are other irritants such as corruption issues, as highlighted by ADBs recent objection to RPPs, amid rumors that Federal Finance Minister, Shaukat Tarin is leaving his office or Tarins statement that Pakistan may not be able to meet this years budget deficit.
But perhaps, the widening of CDS can also be attributed to the growing political noise after the Supreme Courts decision on the NRO - knowing that, according to Citi Investment Research & Analysis, "the exchange rate and Pakistan sovereign bond have typically been the leading indicators of a potential regime change". And, incidentally, both have been on the move of late.
So, is it corruption, political bickering or sub-optimal efforts to curb terrorism? One can be too sure as it is hard to assign weight to each argument. But whatever the reason maybe, foreign investors are showing signs of being short on Pakistan - which means that something is cooking.