Mecklai Graph: Is Spain heading the Greece way?
Mecklai graph of the day: The cost of insuring against default on Spanish sovereign bonds rose to a record high as the nation‘s banking crisis deepened amid banks are unable to access money market.
June 07, 2012 / 17:07 IST
Mecklai graph of the day - Is Spain heading the Greece Way?
As it can be seen from the below chart, the cost of insuring against default on Spanish sovereign bonds rose to a record high as the nation’s banking crisis deepened amid banks are unable to access money market. The CDS, linked to the nation’s debt, climbed by 63 basis points since 24th May till date when Bankia group, the nations third-biggest lender required 19 billion euros as bailout.The CDS spread had constantly been rising since April 2011 but as situation aggravated in the euro region, the spread has steeply risen in the near term. As the CDS spread rises its cost also increases equally. Today, it costs $604,000 per year to insure $10 million of debt for a period of 5-year issued by the country.Default probability has risen from 15% to 40% since April 2011. The risk of probability default is directly implied from CDS spread as seen in the below graph. Thus, concluding if Spain banks are unable to borrow funds from the market we might witness further increase in CDS spread and hence default probability could go up above 50.00%.The below graph shows the movement in the 5-Year Credit Default Swap (an insurance policy to protect against default) for the Sovereign bond of Spain and the probability of default.
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