Norway safest govt debt investment, Ecuador riskiest: Study

14:48, 16 December 2008
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Ukraine among countries with high cumulative probability of default

The country least likely to default on its sovereign debt in the next five years is Norway and the country most likely to is Ecuador, according to a study by data provider CMA Datavision.

Using an "industry standard" model and its own credit default swap (CDS) pricing data, CMA Datavision says the cumulative probability of default (CPD) for Norway over the period is three percent, and 93 percent for Ecuador.

The United States` CPD is six percent, making it the sixth most financially stable sovereign behind Norway, Japan, Germany, France and Finland.

Argentina, Ukraine, Pakistan and Venezuela all have a CPD of 80 percent or higher, according to the study.

The cost of insuring against governments defaulting on their debt has ballooned in recent months as the global economic downturn has forced them to announce heavy borrowing plans to pay for large-scale fiscal packages of spending and tax cuts.

The CDS rates on US, UK and most euro zone sovereign debt have hit record highs recently. Looking at CDS pricing in isolation, investors are paying more to insure against the UK government defaulting than McDonald`s.

"Sovereigns have become more actively traded and more volatile," CMA said in the report.

The most volatile sovereign CDS in the past three months have been Ukraine, Russia, Britain, the United States, Iceland and Ireland.

Countries most likely to default are those where one or more of the following conditions are seen: political instability, terrorist threats, weak rule of law, corruption, heavy dependence on select industries or natural resources, poorly developed financial infrastructure.

Those least likely to default are "highly evolved capitalist nations with stable, democratic systems of government and diversified economies with little chance of regional conflict".

The Economic Times

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