Venezuela heads debt default risk list

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Venezuela has topped a list of the most risky sovereign borrowers, with Lithuania, Lebanon and Romania dropping out of the top 10 riskiest nations to be replaced by Pakistan, Egypt and Iraq.

The report by CMA Datavision is based on the default risk of countries as determined by the price at which their credit default swaps trade in the market. At the end of the first quarter of 2010, the data provider estimated Venezuela had a 48.5 per cent chance of default over the next five years, while Greece which ranked 9th, had a 25.4 per cent probability.

On Wednesday, worries around Greece pushed up the cost of protection against default on its bonds above that of Iceland for the first time, according to data provider Markit.

“It is not a surprise that Venezuela tops the list,” said Nigel Rendell, senior emerging markets strategist at RBC Capital Markets. “What is surprising is that western European countries like Greece and Iceland are now in the top 10. It is a reminder that these regions do have sovereign risk and that just because a country is ‘developed’ does not mean that circumstances cannot change drastically.”

Jerome Booth, head of research at Ashmore Investment Management, thinks the markets are starting to price in the underlying default risk of developed nations. He believes Greece has a greater default risk than Venezuela and expects CDS markets will start to price in a greater risk of default for Greece.

Norway led the list of safest sovereign borrowers. The US fell three spots to rank as the 10th safest sovereign borrower. Analysts at CMA said in the report that spreads on US CDS had increased slightly since the successful passing of the healthcare bill, which commits the government to significant financial investment in health infrastructure and services.

But the UK failed to make the top 10 of the safest sovereign nations. It ranked 21st with a probability of default of 6.7 per cent, according to CMA.

Globally, Portugal saw the greatest deterioration in its creditworthiness as determined in CDS markets over the past quarter.

However, some analysts cautioned against reading too much into the data.

“While I would agree with the ordering of the countries in the top 10, there are other countries that are far more likely to default than Greece that do not appear in the top 10,” said Willem Buiter, chief economist at Citi.

“The implied probabilities of default over the next five-year period, however, are overstated – a 25 per cent chance of Greece defaulting, close to that of Iraq, is ludicrous. It is a useful report, but it reflects the fact that financial markets are driven by nervous investors who invariably over-react in one direction or another.”

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