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.

**Market-implied Probability of Default**: 0.01%

*Source: Citi*

**Market-implied Probability of Default**: 0.03%

**5-year CDS Spread (bps)**: 88

*Source: Citi*

**Market-implied Probability of Default**: 0.06%

**5-year CDS Spread (bps)**: 125

*Source: Citi*

**Market-implied Probability of Default**: 0.06%

**5-year CDS Spread (bps)**: 86

*Source: Citi*

**Market-implied Probability of Default**: 0.07%

**5-year CDS Spread (bps)**: 114

*Source: Citi*

**Market-implied Probability of Default**: 0.08%

**5-year CDS Spread (bps)**: 150

*Source: Citi*

**Market-implied Probability of Default**: 0.10%

**5-year CDS Spread (bps)**: 113

*Source: Citi*

**Market-implied Probability of Default**: 0.11%

**5-year CDS Spread (bps)**: 74

*Source: Citi*

**Market-implied Probability of Default**: 0.13%

**5-year CDS Spread (bps)**: 111

*Source: Citi*

**Market-implied Probability of Default**: 0.13%

**5-year CDS Spread (bps)**: 135

*Source: Citi*

**Market-implied Probability of Default**: 0.14%

**5-year CDS Spread (bps)**: 101

*Source: Citi*

**Market-implied Probability of Default**: 0.16%

**5-year CDS Spread (bps)**: 162

*Source: Citi*

**Market-implied Probability of Default**: 0.16%

**5-year CDS Spread (bps)**: 108

*Source: Citi*

**Market-implied Probability of Default**: 0.21%

**5-year CDS Spread (bps)**: 148

*Source: Citi*

**Market-implied Probability of Default**: 0.22%

**5-year CDS Spread (bps)**: 146

*Source: Citi*

**Market-implied Probability of Default**: 0.23%

**5-year CDS Spread (bps)**: 157

*Source: Citi*

**Market-implied Probability of Default**: 0.24%

**5-year CDS Spread (bps)**: 138

*Source: Citi*

**Market-implied Probability of Default**: 0.28%

**5-year CDS Spread (bps)**: 112

*Source: Citi*

**Market-implied Probability of Default**: 0.34%

**5-year CDS Spread (bps)**: 150

*Source: Citi*

**Market-implied Probability of Default**: 0.48%

**5-year CDS Spread (bps)**: 286

*Source: Citi*

**Market-implied Probability of Default**: 0.55%

**5-year CDS Spread (bps)**: 289

*Source: Citi*

**Market-implied Probability of Default**: 0.55%

**5-year CDS Spread (bps)**: 262

*Source: Citi*

**Market-implied Probability of Default**: 0.60%

**5-year CDS Spread (bps)**: 265

*Source: Citi*

**Market-implied Probability of Default**: 0.61%

**5-year CDS Spread (bps)**: 366

*Source: Citi*

**Market-implied Probability of Default**: 0.66

**5-year CDS Spread (bps)**: 78%

*Source: Citi*

**Market-implied Probability of Default**: 0.72

*Source: Citi*

**Market-implied Probability of Default**: 0.79

**5-year CDS Spread (bps)**: 150

*Source: Citi*

**Market-implied Probability of Default**: 0.88

**5-year CDS Spread (bps)**: 287

*Source: Citi*

**Market-implied Probability of Default**: 0.97

**5-year CDS Spread (bps)**: 162

*Source: Citi*

**Market-implied Probability of Default**: 1.20

**5-year CDS Spread (bps)**: 293

*Source: Citi*

**Market-implied Probability of Default**: 1.45

**5-year CDS Spread (bps)**: 295

*Source: Citi*

**Market-implied Probability of Default**: 2.15%

*Source: Citi*

**Market-implied Probability of Default**: 2.41%

**5-year CDS Spread (bps)**: 371

*Source: Citi*

**Market-implied Probability of Default**: 2.73%

**5-year CDS Spread (bps)**: 447

*Source: Citi*

**Market-implied Probability of Default**: 2.80%

**5-year CDS Spread (bps)**: 379

*Source: Citi*

**Market-implied Probability of Default**: 2.84%

**5-year CDS Spread (bps)**: 776

*Source: Citi*

**Market-implied Probability of Default**: 3.90

**5-year CDS Spread (bps)**: 542

*Source: Citi*

**Market-implied Probability of Default**: 4.10%

**5-year CDS Spread (bps)**: 443

*Source: Citi*

**Market-implied Probability of Default**: 4.53

**5-year CDS Spread (bps)**: 292

*Source: Citi*

**Market-implied Probability of Default**: 5.66

**5-year CDS Spread (bps)**: 625

*Source: Citi*

**Market-implied Probability of Default**: 7.92%

**5-year CDS Spread (bps)**: 810

*Source: Citi*

**Market-implied Probability of Default**: 10.93%

**5-year CDS Spread (bps)**: 1002

*Source: Citi*

**Market-implied Probability of Default**: 11.11%

*Source: Citi*

**Market-implied Probability of Default**: 16.13%

**5-year CDS Spread (bps)**: 916

*Source: Citi*

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