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Here Are The Countries Most Likely To Default

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					Here Are The Countries Most Likely To Default
Simone Foxman|Sep. 14, 2011




Image: 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.

Click here to see the countries and their odds of default >


Greece is still on the bottom.




Image: Wikimedia COmmons
See who gets crushed if Greece defaults.


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




Image: Citi Investment Research and Analysis
Greece




Market-implied Probability of Default: 16.13%

5-year CDS Spread (bps): 916

Source: Citi




Ecuador




Market-implied Probability of Default: 11.11%
Source: Citi




Venezuela




Market-implied Probability of Default: 10.93%

5-year CDS Spread (bps): 1002

Source: Citi
Pakistan




Image: AP

Market-implied Probability of Default: 7.92%

5-year CDS Spread (bps): 810




Ireland
AP

Market-implied Probability of Default: 5.66

5-year CDS Spread (bps): 625

Source: Citi




Iceland




Market-implied Probability of Default: 4.53

5-year CDS Spread (bps): 292

Source: Citi
Ukraine




Market-implied Probability of Default: 4.10%

5-year CDS Spread (bps): 443

Source: Citi




Argentina
Image: AP

Market-implied Probability of Default: 3.90

5-year CDS Spread (bps): 542

Source: Citi




Jamaica




Image: Wikimedia Commons

Market-implied Probability of Default: 2.84%

5-year CDS Spread (bps): 776

Source: Citi
Vietnam




Market-implied Probability of Default: 2.80%

5-year CDS Spread (bps): 379

Source: Citi




Portugal




Image: AP

Market-implied Probability of Default: 2.73%
5-year CDS Spread (bps): 447

Source: Citi




Lebanon




Image: Elie plus via wikimedia commons

Market-implied Probability of Default: 2.41%

5-year CDS Spread (bps): 371

Source: Citi
Macedonia




Image: AP

Market-implied Probability of Default: 2.15%

Source: Citi




Sri Lanka
Image: Flickr

Market-implied Probability of Default: 1.45

5-year CDS Spread (bps): 295

Source: Citi




Romania




Image: Creative Commons

Market-implied Probability of Default: 1.20

5-year CDS Spread (bps): 293

Source: Citi
Kazakhstan




Image: en.wikipedia.org

Market-implied Probability of Default: 0.97

5-year CDS Spread (bps): 162

Source: Citi
Jordan




Image: AP

Market-implied Probability of Default: 0.88

5-year CDS Spread (bps): 287

Source: Citi
Costa Rica




Image: flickr via FirstBaptistNashville

Market-implied Probability of Default: 0.79

5-year CDS Spread (bps): 150

Source: Citi
India




Image: Courtesy of Luxpresso

Market-implied Probability of Default: 0.72

Source: Citi




Malaysia




Image: AP
Market-implied Probability of Default: 0.66

5-year CDS Spread (bps): 78%

Source: Citi




Hungary




Hungarian students: too good for English.

Image: flickr / Ken Owen

Market-implied Probability of Default: 0.61%

5-year CDS Spread (bps): 366

Source: Citi
Spain




Image: AP

Market-implied Probability of Default: 0.60%

5-year CDS Spread (bps): 265

Source: Citi
Lithuania




Image: Flickr

Market-implied Probability of Default: 0.55%

5-year CDS Spread (bps): 262

Source: Citi
Dominican Republic




Market-implied Probability of Default: 0.55%

5-year CDS Spread (bps): 289

Source: Citi




El Salvador




Market-implied Probability of Default: 0.48%
5-year CDS Spread (bps): 286

Source: Citi




Indonesia




Image: AP

Market-implied Probability of Default: 0.34%

5-year CDS Spread (bps): 150

Source: Citi
Colombia




Image: AP

Market-implied Probability of Default: 0.28%

5-year CDS Spread (bps): 112

Source: Citi




Russia
Market-implied Probability of Default: 0.24%

5-year CDS Spread (bps): 138

Source: Citi




Morocco




Market-implied Probability of Default: 0.23%

5-year CDS Spread (bps): 157

Source: Citi
Turkey




Image: AP

Market-implied Probability of Default: 0.22%

5-year CDS Spread (bps): 146

Source: Citi
Uruguay




Image: AP

Market-implied Probability of Default: 0.21%

5-year CDS Spread (bps): 148

Source: Citi
Peru




Image: By whl.travel on flickr

Market-implied Probability of Default: 0.16%

5-year CDS Spread (bps): 108

Source: Citi
Guatemala




Image: Dennis Jarvis

Market-implied Probability of Default: 0.16%

5-year CDS Spread (bps): 162

Source: Citi
Panama




Market-implied Probability of Default: 0.14%

5-year CDS Spread (bps): 101

Source: Citi




Philippines




Image: M.A.W.1 via Flickr
Market-implied Probability of Default: 0.13%

5-year CDS Spread (bps): 135

Source: Citi




Brazil




Image: Asthma Helper via Flickr

Market-implied Probability of Default: 0.13%

5-year CDS Spread (bps): 111

Source: Citi
China




Image: Bloomberg

Market-implied Probability of Default: 0.11%

5-year CDS Spread (bps): 74

Source: Citi
Mexico




Image: AP

Market-implied Probability of Default: 0.10%

5-year CDS Spread (bps): 113

Source: Citi
Poland




Image: Wikimedia Commons

Market-implied Probability of Default: 0.08%

5-year CDS Spread (bps): 150

Source: Citi
Israel




Image: AP

Market-implied Probability of Default: 0.07%

5-year CDS Spread (bps): 114

Source: Citi
Slovenia




Image: Wikimedia Commons

Market-implied Probability of Default: 0.06%

5-year CDS Spread (bps): 86

Source: Citi
South Africa




Image: AP

Market-implied Probability of Default: 0.06%

5-year CDS Spread (bps): 125

Source: Citi
Slovakia




Image: Wikimedia Commons

Market-implied Probability of Default: 0.03%

5-year CDS Spread (bps): 88


Source: Citi
Luxembourg




Market-implied Probability of Default: 0.01%

Source: Citi

				
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