The debt markets are starting to separate Spain from Portugal, Greece, and Ireland

03/11/2011 1:40 pm EST


Jim Jubak

Founder and Editor,

The debt markets are saying that Spain will make it through the euro crisis without a bailout or a default.

What even though Moody’s downgraded Spanish debt yesterday? Yep that was a non-event.  It’s not so much the markets disagree with Moody’s move  as that this downgrade has been in the works and baked into the market for weeks. The weakness in Eurozone debt yesterday and today is vote that nothing significant will emerge from the latest round of talks on solving the euro debt crisis.

At the same time the debt markets are also saying Portugal will need a rescue (34% chance) and that there’s a 60% chance of a Greek default. The markets give Ireland a 40% chance of a default.

These reads all come from the market for credit-default swaps. Credit-default swaps give the buyer protection (as long as the guy on the other end of the deal doesn’t go bust) against default of a country’s bonds for five years—for a price. The higher the price, the greater the odds, in the market’s opinion, that a country will default within five years. Working backward from the price of this “insurance” you can work out the market’s odds on a default taking place.

This week, for example, the average annual cost of protecting against Greek default signaled a 60% probability of default in five years.

On the other hand, the market increasingly believes that Spain has cut its budget enough, introduced enough labor market reforms, and is growing fast enough so that the country will avoid a default. The cost of credit-default swaps on Spain has fallen from 3.5 percentage points at the beginning of the year to 2.5 percentage points this week. Spain has still got a way to go before it joins Germany among the elite (German swaps trade at just 0.48 percentage points) but a drop of a full percentage point is significant progress.

Italy is moving in the right direction too with swaps falling to 1.79 percentage points last week from 2.4 percentage points at the beginning of the year.

Credit-default swaps for Greece traded at 10.35 percentage points on March 8, a record, up from 8.0 percentage points in February. Irish swaps trade at 5.88 percentage points. Swaps on Portuguese debt trade at 4.97 percentage points, up from 3.87 percentage points in February.

A big part of what distinguishes Spain from Portugal, Ireland, and Greece is economic growth. Spain is growing while Portugal is showing signs of slipping back into recession and Greece has never crawled out of its slump.

This all translates into lower interest rates for Spain and rising rates for Portugal, Ireland, and Greece. Portugal did manage to sell $1.35 billion in bonds due in 2013 on March 8, but buyers demanded a yield of 5.993%. That compares with a 4.086% yield at Portugal’s September 2010 bond sale.
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