Our most recent Credit Market Pulse publication includes a unique credit risk heatmap, which provides a visual representation of the median probability of default (PD) levels for all non-financial corporations in Europe based on our equity-based PD Model Market Signals. This aggregate risk level may be used as an indicator of the overall risk level in each country and can potentially highlight trends when compared with other sovereign credit measures.
In the heatmap, you can clearly see high relative risk levels for countries in Southern Europe. Portugal (with a PD of 2.54%), Cyprus (3.20%) and Greece (4.35%), all colored in orange (high risk), have aggregate PD levels that map to quantitatively-derived credit scores at the ‘b’ level. Other recently troubled Southern European countries, specifically Spain (0.66%) and Italy (0.87%), colored in yellow (medium risk), have aggregate PD levels that map to credit scores at the ‘bb’ level.
There appears to be a clear divide between credit risk levels of Southern Europe (mostly in orange and yellow) and Northern Europe (mostly green, indicating lower risk levels).
Interestingly, five years after the financial crisis, Ireland is now in the lowest credit risk category with a PD of 0.09%, despite its past association with the higher risk countries in Southern Europe.
Other macro trends currently playing out in Europe can also be observed on the heatmap. Most obvious is the credit risk toll that Ukraine (18.57%) has suffered from its tumultuous relationship with Russia over recent months.
Another interesting observation is that two bell-weather economies of Europe (France and Germany) experienced increases of more than 20% in their PD levels between mid-June 2013and the end of August. This is likely reflective of the overall decline in credit quality of Western Europe versus other global developed regions, discussed more broadly in the full report.
In the full Credit Market Pulse September edition, we also review the credit risk trends behind the S&P Europe 350 and S&P 500 indices. Click here to read the full report and subscribe receive the next issue.