Wednesday, July 13, 2011
What do Spain and Vietnam have in common?
Roughly a 25% chance of defaulting over the next 5 years. That's what the credit default swap market is telling us.
Vietnam's long-term rating is B1 by Moody's, BB- by S&P, and B+ by Fitch (not that these ratings really 'mean' anything). Spain's current rating is high investment grade - Aa2, AA, and AA+ by Moody's, S&P, and Fitch, respectively. Italy's is in good company as well, the low BBB camp (Croatia and Hungary, for example). Italy is currently rated mid- to low- A by all three rating agencies.
My model (not shown) rates Italy BBB and Spain BBB+ based on economic and structural fundamentals on a cross-section of 76 emerging and developed countries.
The chart above illustrates the shift in CDS pricing from 2 years ago (X-axis) to today (Y-axis). The red line is the 45-degree line. All sovereigns above the red line saw a point-to-point increase in CDS spreads spanning the last two years. There are a lot of European economies populating the upper-left area of the chart.
Is Europe going to end up with a few investment grade credits alongside a host of below-investment grade credits? Greece is roughly CCC by all three major rating agencies. At this time, Portugal and Ireland are below investment grade by Moody's only, Ba2 and Ba1, respectively. We'll see.
Finally, a bird's-eye view of CDS-land.