Sovereign Default Risk Assessment from the Bottom-Up

32 Pages Posted: 6 Oct 2010

See all articles by Edward I. Altman

Edward I. Altman

New York University (NYU) - Salomon Center; New York University (NYU) - Department of Finance

Herbert A. Rijken

Vrije Universiteit Amsterdam (Free University)

Date Written: September 2010

Abstract

In 2010, the world’s focus on the global financial crisis shifted from financial markets and institutions to sovereign debt, especially in Europe. This has motivated a re-examination of techniques and traditional indicators to assess the health of individual countries. Since the potential financial and economic implosion of several European countries seemed to erupt fairly quickly, one might conclude that the existing scholarly and practitioner methods were not adequate. We believe that one can learn a great deal about sovereign risk by, in addition to observing traditional macroeconomic measures of performance, to also carefully assess the health and aggregate default risk of a nation’s private corporate sector - - a type of “bottom-up” analysis. Models such as Altman’s original Z-Score technique and more recently, the Z-Metrics’ risk system, can provide important early warning measures of sovereign vulnerability. This study does just that by analyzing the Z-Metrics’ median probability of default (PD) of nine European countries and the USA from two time periods prior to the clear recognition of serious financial difficulties in the Eurosector. Our measures of PDs are also compared to the implied probability of default from a prominent market indicator, the credit default swap market, with both general confirmation and some surprising results.

Suggested Citation

Altman, Edward I. and Rijken, Herbert A., Sovereign Default Risk Assessment from the Bottom-Up (September 2010). NYU Working Paper No. 2451/29825, Available at SSRN: https://ssrn.com/abstract=1688195

Edward I. Altman (Contact Author)

New York University (NYU) - Salomon Center ( email )

44 West 4th Street
New York, NY 10012
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212-998-0709 (Phone)
212-995-4220 (Fax)

New York University (NYU) - Department of Finance ( email )

Stern School of Business
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New York, NY 10012-1126
United States

Herbert A. Rijken

Vrije Universiteit Amsterdam (Free University) ( email )

De Boelelaan 1105
Amsterdam, 1081HV
Netherlands
+31 20 5986101/6060 (Phone)
+31 20 5986020 (Fax)

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