CDS on Sri Lanka!!

Last week, Sri Lanka issued its first international bond for $500 million. Predictably, a CDS market has evolved – with the 5 yr CDS trading at 360 b.p. I am not sure if there has been any study that decomposes this spread into: (a) Sri Lanka’s abilities to repay given increased hikes in domestic rates and decline in economic growth locally (b) sustained international risk-appetite? Theoretically, CDS is equivalent to a bond financed with an hedge on it -- thus making it an unfunded deal (can you see that?). Thus, CDS premium is compared to a asset swap -- and not to a bond's spread on the treasuries. More loosely, in cases like Sri Lanka where an asset swap market are not known to trade actively, CDS premiums tend to lead Bond premiums – and given the highly volatile political and economic climate – there can be substantial divergence in the intermediate term spreads quoted in the CDS and the Bond market. Typically, the CDS premia are on average higher over time than the Bond risk-premia. This CDS Basis (i.e., strictly speaking CDS Basis = CDS spreads - Asset Swap Spreads) can fluctuate substantially -- and Sri Lanka should be no different.
Things that make the CDS Basis tighter:

• Other Credit Products launched on Sri Lanka. (Pretty Unlikely)
• Decline in Civil War (Unlikely)
• If Credit Quality improves and Sri Lanka has any reduced coupon clauses. (Unclear)

More thought is required, but if Sri Lanka is met with success -- one could see a rising increasing in issues/CDS from "really small open economies".