Here Are The Countries Most Likely To Default

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Photo: Nils van der Burg

What is the mathematical likelihood that a sovereign will default?Citi’s Investment and Research team thinks they have a pretty good answer.

A recent report out from their team proposes a new method for calculating companies’ and sovereigns’ probability of default, using credit spreads and spread volatility to alter the ratings set out by agencies and other models.

The report is highly technical, but here’s a pretty simple explanation of why they say their model works:

Estimating expected default probabilities using existing models of credit has proved problematic. We introduced an approach to deriving PDs from obligors’ credit spreads and corresponding spread volatilities calibrated to PDs obtained from credit models and agency ratings. Our method assumes that credit spreads are linear functions of spread volatility and that investors require the same level of spread compensation per unit of spread volatility, regardless of its source. Empirical evidence supporting our assumptions was presented, and the resulting distributions of market-implied ratings were contrasted with those of agency ratings.

They use this model to calculate the likelihood that 44 sovereigns will default. So who’s going down first?

Everyone knew Greece was doomed, but turns out that Ecuador and Venezuela might give the Greeks a run for their money.

Luxembourg

Market-implied Probability of Default: 0.01%

Source: Citi

Slovakia

Market-implied Probability of Default: 0.03%

5-year CDS Spread (bps): 88

Source: Citi

South Africa

Market-implied Probability of Default: 0.06%

5-year CDS Spread (bps): 125

Source: Citi

Slovenia

Market-implied Probability of Default: 0.06%

5-year CDS Spread (bps): 86

Source: Citi

Israel

Market-implied Probability of Default: 0.07%

5-year CDS Spread (bps): 114

Source: Citi

Poland

Market-implied Probability of Default: 0.08%

5-year CDS Spread (bps): 150

Source: Citi

Mexico

Market-implied Probability of Default: 0.10%

5-year CDS Spread (bps): 113

Source: Citi

China

Market-implied Probability of Default: 0.11%

5-year CDS Spread (bps): 74

Source: Citi

Brazil

Market-implied Probability of Default: 0.13%

5-year CDS Spread (bps): 111

Source: Citi

Philippines

Market-implied Probability of Default: 0.13%

5-year CDS Spread (bps): 135

Source: Citi

Panama

Market-implied Probability of Default: 0.14%

5-year CDS Spread (bps): 101

Source: Citi

Guatemala

Market-implied Probability of Default: 0.16%

5-year CDS Spread (bps): 162

Source: Citi

Peru

Market-implied Probability of Default: 0.16%

5-year CDS Spread (bps): 108

Source: Citi

Uruguay

Market-implied Probability of Default: 0.21%

5-year CDS Spread (bps): 148

Source: Citi

Turkey

Market-implied Probability of Default: 0.22%

5-year CDS Spread (bps): 146

Source: Citi

Morocco

Market-implied Probability of Default: 0.23%

5-year CDS Spread (bps): 157

Source: Citi

Russia

Market-implied Probability of Default: 0.24%

5-year CDS Spread (bps): 138

Source: Citi

Colombia

Market-implied Probability of Default: 0.28%

5-year CDS Spread (bps): 112

Source: Citi

Indonesia

Market-implied Probability of Default: 0.34%

5-year CDS Spread (bps): 150

Source: Citi

El Salvador

Market-implied Probability of Default: 0.48%

5-year CDS Spread (bps): 286

Source: Citi

Dominican Republic

Market-implied Probability of Default: 0.55%

5-year CDS Spread (bps): 289

Source: Citi

Lithuania

Market-implied Probability of Default: 0.55%

5-year CDS Spread (bps): 262

Source: Citi

Spain

Market-implied Probability of Default: 0.60%

5-year CDS Spread (bps): 265

Source: Citi

Hungary

Market-implied Probability of Default: 0.61%

5-year CDS Spread (bps): 366

Source: Citi

Malaysia

Market-implied Probability of Default: 0.66

5-year CDS Spread (bps): 78%

Source: Citi

India

Market-implied Probability of Default: 0.72

Source: Citi

Costa Rica

Market-implied Probability of Default: 0.79

5-year CDS Spread (bps): 150

Source: Citi

Jordan

Market-implied Probability of Default: 0.88

5-year CDS Spread (bps): 287

Source: Citi

Kazakhstan

Market-implied Probability of Default: 0.97

5-year CDS Spread (bps): 162

Source: Citi

Romania

Market-implied Probability of Default: 1.20

5-year CDS Spread (bps): 293

Source: Citi

Sri Lanka

Market-implied Probability of Default: 1.45

5-year CDS Spread (bps): 295

Source: Citi

Macedonia

Market-implied Probability of Default: 2.15%

Source: Citi

Lebanon

Market-implied Probability of Default: 2.41%

5-year CDS Spread (bps): 371

Source: Citi

Portugal

Market-implied Probability of Default: 2.73%

5-year CDS Spread (bps): 447

Source: Citi

Vietnam

Market-implied Probability of Default: 2.80%

5-year CDS Spread (bps): 379

Source: Citi

Jamaica

Market-implied Probability of Default: 2.84%

5-year CDS Spread (bps): 776

Source: Citi

Argentina

Market-implied Probability of Default: 3.90

5-year CDS Spread (bps): 542

Source: Citi

Ukraine

Market-implied Probability of Default: 4.10%

5-year CDS Spread (bps): 443

Source: Citi

Iceland

Market-implied Probability of Default: 4.53

5-year CDS Spread (bps): 292

Source: Citi

Ireland

Market-implied Probability of Default: 5.66

5-year CDS Spread (bps): 625

Source: Citi

Pakistan

Market-implied Probability of Default: 7.92%

5-year CDS Spread (bps): 810

Source: Citi

Venezuela

Market-implied Probability of Default: 10.93%

5-year CDS Spread (bps): 1002

Source: Citi

Ecuador

Market-implied Probability of Default: 11.11%

Source: Citi

Greece

Market-implied Probability of Default: 16.13%

5-year CDS Spread (bps): 916

Source: Citi

Take a look at everyone's favourite PIGS (sadly no Italy)

Greece is still on the bottom.

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