Sovereign Debt Default Risk Declines Significantly

The last time we posted our table of sovereign debt default risk was on February 5th, when worries about Greece and Europe were pretty much at their peaks.  The S&P 500 ended up making a short-term low on the following trading day, and since then, sovereign default risk has eased substantially around the world.  Below we highlight the change in credit default swap prices (default risk) for various countries both year to date and since February 5th.  The table is sorted by change since February 5th.  As shown, default risk has fallen for all but three countries since 2/5.  It has fallen the most for Portugal, Austria, Spain, Australia, and the US.  If you look back at the table from 2/5, you'll see that the countries that had spiked the most year to date at that point are the ones that have fallen the most since then. 

There have now been two periods since the bull market began last March where sovereign debt worries spooked the market -- the Dubai incident in late November and the Greece/PIGS incident in Q1 '2010.  The market has pretty much regained its footing following both periods.  While Greece issues remain somewhat unresolved, global equity markets have seemingly moved on from it. 

What investors want to know now is whether the incidents are making the market's foundation stronger once they pass, or whether each subsequent incident is building more pressure that could cause an even bigger COLLAP$E!

Below is a chart highlighting the change in sovereign debt credit default swap prices since February 5th.  As shown, Portugal default risk is down the most at 40%, followed by Austria (-38%), and Spain (-32%).  Vietnam, Argentina, and Egypt are the only countries that have seen default risk increase.    

Below we highlight current 5-year credit default swap prices.  For each country, the price represents the cost per year to insure $10,000 worth of sovereign debt for five years.  As shown, Argentina and Venezuela have by far the highest default risk of any country highlighted.  For both countries, you have to put up more than 10% of your investment each year to insure against default for the next five years.  Dubai has the third highest default risk, followed by Iceland and then Greece.  Germany, Australia, and France currently have the lowest credit default swap prices.  (The US is not shown below because its CDS prices are in Euros.)

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Comments

[guest]

Where Ukraine?

[Eric]

Where is Canada?

[Bespoke]

We don't have CDS data for Ukraine or Canada.

[guest]

http://www.markit.com/en/about/news/commentary/cds/cds.page

[JB.]

Wonderful post... Very informational and educational as usual!

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