As a result, credit growth to the private sector has decelerated rapidly, and there is an emerging risk of a vicious circle between weakening economic activity and deteriorating asset quality.
Against this background, as shown in Chart 3, sovereign credit default swap (CDS) spreads increased sharply in early 2009, especially in those economies with a large fiscal deficit and a wide current account deficit, and where domestic demand has weakened significantly. The CDS spreads have narrowed substantially since March 2009, but they remain at levels well above those in the first half of 2007.