Fathom’s probability of default indicators calculate the market-implied probabilities of sovereign defaults based upon credit default swaps. The latest data suggest that the market views the likelihood of any European sovereign defaulting as remote, with the indicators for all countries bar Greece remaining below 10%.
For Greece, the likelihood of default remains high — the market views the probability of a default by the euro area’s most indebted nation within the next five years as 28%. Such concerns are likely to be highlighted this summer as Greece seeks to negotiate a clean exit from its bailout programme.
Last year, the Greek economy returned to growth, expanding by 1.4%. However, it remains fragile with output roughly a quarter lower than it was in 2007.
Since the crisis, the Greek government has managed to achieve a substantial fiscal adjustment and the government is projected to run another primary budget surplus this year. While a successful departure may appear likely given the current economic outlook and present funding conditions, the sovereign’s liabilities remain vast and interest payments alone were worth 3% of GDP last year.
At present, financial market conditions remain relatively benign, however this could change quickly and unexpectedly. Fathom would therefore caution that Greek government finances remain highly susceptible to market sentiment and that a smooth exit is by no means guaranteed.
Only a few years ago, there were real concerns that a Greek default could prove the beginning of the end for the euro area. However, the threat of contagion to the rest of the currency bloc has declined substantially since the peak of the crisis. Indeed, in a recent survey of attendees at Fathom’s 2018 Q1 Monetary Policy Forum, a majority of participants indicated their belief that the euro area’s future appeared secure. Similar views appear to be reflected in financial markets — Fathom’s proprietary indicators calculate that the market-implied likelihood of a euro exit within the next five years remains below 5% for all countries.
 Although elevated, Greece’s interest liabilities are less than those of Portugal, Italy and Cyprus owing to the debt relief provided by the private sector.
Overall Fathom concurs with the market’s view that the euro area is unlikely to fall apart in the near future. Arguably, there is even some scope for upside risk if Germany and France make progress towards enhancing the durability of the currency bloc’s structural framework — a so-called ‘golden scenario’ for the euro area.
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