Ireland given 25% chance of bankruptcy
The cost of protecting Irish, German, Belgian and Slovak government debt against default rose to record highs yesterday, according to monitor CMA DataVision.
CMA said the cumulative probability of default (CPD) by the Government currently stands at 24.6%, up from 20% at the end of January. The cost of insuring against the Government defaulting has soared by 1,562% since May of last year.
Five-year credit default swaps (CDS) on Irish government debt climbed to a record 325 basis points yesterday, from 272 basis points at close on Wednesday, CMA said. They closed at 324.5bps.
CMA told the Irish Examiner yesterday that the Irish five-year CDS hit a record 325,000 basis points, meaning it now costs e325,000 per year to insure an exposure of e10 million Irish government bonds.
With Irish Government debt standing at e51.16bn at the end of January this means that it currently cost holders of Government bonds a total of e1.66bn a year to insure against the Government defaulting on its debt. This is e32.5m per e1 billion borrowed.
The cost of securing insurance to cover against the Irish Government defaulting on its debts continues to soar and in the wake of Wednesday’s e7bn recapitalisation of AIB and Band of Ireland, it will continue to rise.
On May 14, 2008, the five-year CDS to protect Irish Government Bonds was trading at 20.8 basis points. This meant it cost e20,800 a year at that time to protect an exposure of e10m government bonds.
CMA said that Germany’s risk of default over the course of the next five years had edged up as the CDS rate rose, such that there was a CPD of 5.3% compared with 5.2% on Wednesday.
The comparable CPD for Ireland was 24%, up from 21.1% on Wednesday. CPD on Belgium was 10.7%, up from 9.3%, and for Slovakia was 18.7%, up from 17.8%.
Britain’s sovereign CDS also hit a new record of 148bps, compared to 127.4 on Wednesday.
“It is going to be a very, very busy day in the sovereign markets. We are seeing big moves and high volatility across the board,” said one trader in London.
Investors, fretting about the scale of financial rescue programmes to tackle recession, have been repricing risk of sovereign debt.
Credit default swaps reflect bond investors’ concern that major sovereign bonds’ credit quality may slip in the future and comes after Moody’s Investor Services placed Ireland and Spain in a “vulnerable” category in a report on triple-A rated nations.
The category does not constitute a change in the rating or outlook for the countries but is a test of financial stress and attached risks.
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