GRAPHIC-Italy, Spain key euro zone default dominoes -study
Reuters - 19/09/2011 15:34:49
LONDON, Sept 19 (Reuters) -
A default by euro zone strugglers Italy or Spain would triple the likelihood of France failing to meet repayments to almost 50 percent, a study based on credit default swap prices shows.
This conclusion, drawn from a Fathom Consulting model which shows how the chances of a country defaulting would change if another sovereign were unable to pay its debts, underlines how high the stakes are in the currency bloc's battle to halt the spread of its debt crisis.
The probability of default by France, the euro zone's second biggest economy, would rise to 48 percent from 15 percent in the event that either Italy or Spain failed to honour repayment of its debts, the model shows.
French bank shares have suffered in recent weeks as markets have fretted about heavy exposure to Italy. Latest data from the Bank of International Settlements show French banks hold more than 400 billion euros of Italian private, public and bank debt.
In contrast, a Greek default only pushed the likelihood of Italy, Spain or France defaulting higher by 3 percentage points.
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"The probability of France or Italy defaulting given Greece defaulting is not that much higher than their unconditional probabilities and that is because their CDS spreads are not as highly correlated with Greece's," said Yiannis Koutelidakis, an economist at Fathom Consulting
"The markets don't believe so much that a default by Greece would materially affect France or Italy."
However, if the crisis took down Italy or Spain -- something market prices see carrying a 31 percent probability -- France would begin to look much more vulnerable.
"This makes sense because they are larger economies and they are much more closely integrated with the French economy than, say Greece," Koutelidakis said.
The conditional probability of default model is based solely on the price of credit default swaps -- insurance contracts taken out against a failure to pay.