Www.riskmetrics.com 1 Toward A Bottom-Up Approach in Assessing Sovereign Default Risk NYU Stern Alumni Conference London June 03, 2011.

www.riskmetrics.com 1

Toward A Bottom-Up Approach in Assessing Sovereign Default Risk

NYU Stern Alumni Conference

London

June 03, 2011


June 01, 2007 – May 6, 2011

Source: Citigroup Yieldbook Index Data

200

400

600

800

1,000

1,200

1,400

1,600

1,800

2,000

2,200

6/1/2007

7/13/2007

8/24/2007

10/5/2007

11/16/2007

12/31/2007

2/12/2008

3/25/2008

5/6/2008

6/17/2008

7/29/2008

9/9/2008

10/21/2008

12/2/2008

1/15/2009

2/26/2009

4/9/2009

5/21/2009

7/2/2009

8/13/2009

9/24/2009

11/5/2009

12/17/2009

2/1/2010

3/15/2010

4/26/2010

6/7/2010

7/19/2010

8/30/2010

10/11/2010

11/22/2010

1/3/2011

2/14/2011

3/28/2011

6/12/07 (260bp)

4/26/10 (442bp)

05/06/11 (408bp)

12/16/08 (2,046bp)

YTM Spread Between High Yield Markets & 10 Year Treasury Notes


Major Risks Going Forward (For 2011)

Real Economy – Primarily U.S. (Double-Dip?): Impact on Default Rates & Credit Availability

Sovereign Debt Crisis – Europe

Contagion Between Markets – Debt and Equity

Maturity Schedule On Private and Public Debt

Inflation and Rise in Interest Rates

Municipal Bond Market Troubles

Uncertainties (non-quantifiable)


Sovereign Ratings Actions2009 - Present

GreeceRa

ting

s

A1 A2 A3

Ba1B1


PortugalRa

ting

s

Aa2A1 A3

Baa1



IrelandRa

ting

s

AAA Aa2

Baa1Baa3

Aa1



SpainRa

ting

s

AAA

Aa2

Aa1



(Z-Metrics PD Estimates and Implied PDs from CDS Spreads)

*Assuming a 40% recovery rate (R); based on the median CDS spread (s). PD Computed as 1-e(-5*s/(1-R))

Sources: RiskMetrics Group (MSCI), Markit, Compustat.

Z-Metrics PD Esimates: Five-Year Public Model

ListedCompanie

sY/E 2010

Median PDY/E 2009

Median PDY/E 2008

Median PD

Five-Year Implied PDFrom CDS Spread*

Country 2010 2009 2008

Netherlands 85 3.56% 3.33% 5.62% 2.03% 2.83% 6.06%

U.S.A. 2226 3.65% 3.93% 6.97% 3.79% 3.28% 4.47%

Sweden 245 3.71% 5.31% 6.74% 2.25% 4.60% 6.33%

Ireland 29 3.72% 6.45% 7.46% 41.44% 12.20% 17.00%

Belgium 69 3.85% 5.90% 5.89% 11.12% 4.58% 5.53%

U.K. 507 4.28% 3.62% 5.75% 4.73% 6.52% 8.13%

France 351 4.36% 5.51% 7.22% 4.51% 3.75% 4.05%

Germany 348 4.63% 5.54% 7.34% 2.50% 2.67% 3.66%

Italy 174 7.29% 7.99% 10.51% 9.16% 8.69% 11.20%

Spain 91 7.39% 6.44% 7.39% 14.80% 9.39% 8.07%

Portugal 33 10.67% 9.36% 12.07% 41.00% 10.90% 7.39%

Greece 93 15.28% 10.60% 11.57% 70.66% 24.10% 13.22%

Financial Health of the Corporate, Non-Financial Sector: Selected European Countries and U.S.A. in 2008-2010


Weighted Average Median 5-Year PD for Listed Non-Financial1

and Banking Firms2 (Europe & US): 2009

1 Based on Z-Metrics Default Probability Model.2 Based on Altman-Rijken Model (Preliminary)

Non-Financial Firms Banking Firms

Country PD (%) Weight PD (%) WeightWeighted Average

(%)

Rank

CDS Spread PD (%)

Rank

Netherlands 3.33 0.968 18.8 0.032 3.82 1 2.83 2

U.K. 3.62 0.965 20.4 0.035 4.21 2 6.52 7

U.S.A. 3.93 0.821 16.9 0.179 6.25 5 3.28 3

France 5.51 0.931 19.2 0.069 6.45 7 3.75 4

Germany 5.54 0.938 15.1 0.062 6.13 4 2.67 1

Sweden 5.31 0.984 12.8 0.016 5.43 3 4.60 6

Ireland 6.45 0.848 53.5 0.152 13.60 12 12.20 11

Italy 7.99 0.876 18.1 0.124 9.24 9 8.69 8

Belgium 5.90 0.957 12.4 0.043 6.18 6 4.58 5

Spain 6.44 0.882 11.7 0.118 7.06 8 9.39 9

Portugal 9.36 0.857 16.2 0.143 10.34 10 10.90 10

Greece 10.60 0.868 24.9 0.132 12.49 11 24.10 12


Weighted Average Median 5-Year PD for Listed Non-Financial1 and Banking Firms2 (Europe & US): 2010

1 Based on Z-Metrics Default Probability Model.2 Based on Altman-Rijken Model (Preliminary)* PD based on CDS Spread as of 4/26/2011

Non-Financial Firms Banking Firms

Country PD (%) Weight PD (%) WeightWeighted

Average (%)Ran

k

CDS Spread PD

(%)*Rank

Netherlands

3.56 0.977 11.1 0.023 3.73 1 2.03 1

U.K. 4.28 0.977 15.5 0.023 4.54 5 4.73 6

U.S.A. 3.65 0.837 13.8 0.163 5.30 7 3.79 4

France 4.36 0.986 14.0 0.014 4.49 4 4.51 5

Germany 4.63 0.983 13.1 0.017 4.77 6 2.50 3

Sweden 3.71 0.984 17.3 0.016 3.93 2 2.25 2

Ireland 3.72 0.906 77.6 0.094 10.65 10 41.44 11

Italy 7.29 0.906 20.0 0.094 8.48 9 9.16 7

Belgium 3.85 0.972 12.4 0.028 4.21 3 11.12 8

Spain 7.39 0.948 10.9 0.052 7.57 8 14.80 9

Portugal 10.67 0.971 12.1 0.029 10.71 11 41.00 10

Greece 15.28 0.921 30.1 0.079 16.45 12 70.66 12


Five Year Implied Probabilities of Default (PD) From Capital Market CDS Spreads*Greece, Jan. 2009 – Apr. 2011

*Assumes 40% Recovery Rate.Source: Markit

11

01020304050607080

01-J

AN

-09

06-F

EB-0

916

-MA

R-09

21-A

PR-0

927

-MA

Y-09

02-J

UL-

0907

-AU

G-0

914

-SEP

-09

20-O

CT-0

925

-NO

V-09

31-D

EC-0

905

-FEB

-10

15-M

AR-

1020

-APR

-10

26-M

AY-

1001

-JU

L-10

06-A

UG

-10

13-S

EP-1

019

-OCT

-10

24-N

OV-

1030

-DEC

-10

04-F

EB-1

114

-MA

R-11

19-A

PR-1

1

Def

ault

Pro

babi

lity

(As

%)

Greece


Five Year Implied Probabilities of Default (PD) From Capital Market CDS Spreads*Portugal, Jan. 2009 – Apr. 2011

*Assumes 40% Recovery Rate.Source: Markit 12

05

1015202530354045

01-J

AN

-09

06-F

EB-0

916

-MA

R-09

21-A

PR-0

927

-MA

Y-09

02-J

UL-

0907

-AU

G-0

914

-SEP

-09

20-O

CT-0

925

-NO

V-09

31-D

EC-0

905

-FEB

-10

15-M

AR-

1020

-APR

-10

26-M

AY-

1001

-JU

L-10

06-A

UG

-10

13-S

EP-1

019

-OCT

-10

24-N

OV-

1030

-DEC

-10

04-F

EB-1

114

-MA

R-11

19-A

PR-1

1

Def

ault

Pro

babi

lity

(As

%)

Portugal


Recent Five-Year Probability of Default (PD) Implied From Capital Market CDS Spreads

Sources: Author Calculations from MSCI Group, Compustat Data

Country

Five Year Implied

PD from Capital

Market CDS

Spreads

(12/15/10)

Five Year Implied

PD from Capital

Market CDS

Spreads

(04/26/11)

Netherlands 3.66% 2.03%

United Kingdom 4.68% 4.73%

USA 2.27% 3.79%

France 6.65% 4.51%

Germany 3.19% 2.50%

Spain 19.45% 14.80%

Ireland 33.67% 41.44%

Italy 11.63% 9.16%

Portugal 26.40% 41.00%

Greece 51.79% 70.66%

(December 15, 2010 & April 26, 2011 Results)

Www.riskmetrics.com 1 Toward A Bottom-Up Approach in Assessing Sovereign Default Risk NYU Stern Alumni Conference London June 03, 2011.

Documents

year pd

median pd ye

present slide

median pd fiveyear implied

median cds

zmetrics pd esimates

zmetrics pd estimates

rank cds