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Countries with the Highest Default Risk in 2022

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sovereign debt risk ranking

Countries with the Highest Default Risk in 2022

In May 2022, the South Asian nation of Sri Lanka defaulted on its debt for the first time. The country’s government was given a 30-day grace period to cover $78 million in unpaid interest, but ultimately failed to pay.

Not only does this impact Sri Lanka’s economic future, but it also raises an important question: which other countries are at risk of default?

To find out, we’ve used data from Bloomberg to rank the countries with the highest default risk.

The Sovereign Debt Vulnerability Ranking

Bloomberg’s Sovereign Debt Vulnerability Ranking is a composite measure of a country’s default risk. It’s based on four underlying metrics:

  • Government bond yields (the weighted-average yield of the country’s dollar bonds)
  • 5-year credit default swap (CDS) spread
  • Interest expense as a percentage of GDP
  • Government debt as a percentage of GDP

To better understand this ranking, let’s focus on Ukraine and El Salvador as examples.

CountryRankGovernment Bond
Yield (%)
5Y CDS SpreadInterest Expense
(% of GDP)
Government Debt
(% of GDP)
🇸🇻 El Salvador131.8%3,376 bps
(33.76%)
4.9%82.6%
🇺🇦 Ukraine860.4%10,856 bps
(100.85%)
2.9%49%

1 basis point (bps) = 0.01%

Why are Ukraine’s Bond Yields so High?

Ukraine has high default risk due to its ongoing conflict with Russia. To understand why, consider a scenario where Russia was to assume control of the country. If this happened, it’s possible that Ukraine’s existing debt obligations will never be repaid.

That scenario has prompted a sell-off of Ukrainian government bonds, pushing their value down to nearly 30 cents on the dollar. This means that a bond with face value of $100 could be purchased for $30.

Because yields move in the opposite direction of price, the average yield on these bonds has climbed to a very high 60.4%. As a point of comparison, the yield on a U.S. 10-year government bond is currently 2.9%.

What is a CDS Spread?

Credit default swaps (CDS) are a type of derivative (financial contract) that provides a lender with insurance in the event of a default. The seller of the CDS represents a third party between the lender (investors) and borrower (in this case, governments).

In exchange for receiving coverage, the buyer of a CDS pays a fee known as the spread, which is expressed in basis points (bps). If a CDS has a spread of 300 bps (3%), this means that to insure $100 in debt, the investor must pay $3 per year.

Applying this to Ukraine’s 5-year CDS spread of 10,856 bps (108.56%), an investor would need to pay $108.56 each year to insure $100 in debt. This suggests that the market has very little faith in Ukraine’s ability to avoid default.

Why is El Salvador Ranked Higher?

Despite having lower values in the two metrics discussed above, El Salvador ranks higher than Ukraine because of its larger interest expense and total government debt.

According to the data above, El Salvador has annual interest payments equal to 4.9% of its GDP, which is relatively high. Comparing to the U.S. once more, America’s federal interest costs amounted to 1.6% of GDP in 2020.

When totaled, El Salvador’s outstanding debts are equal to 82.6% of GDP. This is considered high by historical standards, but today it’s actually quite normal.

The next date to watch will be January 2023, as this is when the country’s $800 million sovereign bond reaches maturity. Recent research suggests that if El Salvador were to default, it would experience significant, yet temporary, negative effects.

Another Hot Topic for El Salvador: Bitcoin

In September 2021, El Salvador became the first country in the world to adopt bitcoin as legal tender. This means that Bitcoin is recognized by law as a means to settle debts and other obligations.

The International Monetary Fund (IMF) criticized this decision in early 2022, urging the country to revoke legal tender status. In hindsight, these warnings were wise, as Bitcoin’s value has fallen by 56% year-to-date.

While this isn’t directly related to El Salvador’s default risk, it does open potential avenues for relief. For instance, large players in the crypto space may be willing to assist the government to keep the concept of “nation-state bitcoin adoption” alive.

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Cryptocurrency

Ranked: Crypto Popularity Across European Union Nations

This chart shows crypto popularity amongst European Union investors relative to traditional assets like stocks, bonds, and funds.

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Ranked: Crypto Popularity Across European Union Nations

Depending on where you live, investors can have wildly different preferences when it comes to choosing asset classes.

For a modern example, we can see how different countries (and regions) act when it comes to cryptocurrency. Within the European Union—one of the regions dealing with faster crypto adoption—attitudes towards investing can vary considerably.

This graphic from Gilbert Fontana looks at crypto popularity amongst investors in the EU using data from the European Commission’s Eurobarometer. It compares exposure to cryptocurrencies relative to stocks, funds, and bonds.

Crypto Popularity in Europe in 2022

Given that crypto has experienced bubble-like asset rallies, including a dramatic rise to over a trillion dollars in value before crashing, it’s fair to say it’s well known by now.

But even with a vast rise in awareness, there are still discrepancies between the level of investment crypto receives amongst European Union nations. Let’s see which countries have the highest proportion of citizens invested in crypto:

CountryPopulation Investing in CryptoPopulation Investing in Traditional Assets
🇸🇮 Slovenia18%22%
🇭🇷 Croatia16%17%
🇱🇺 Luxembourg14%36%
🇧🇬 Bulgaria13%13%
🇨🇾 Cyprus13%10%
🇸🇰 Slovakia12%25%
🇦🇹 Austria12%32%
🇵🇹 Portugal12%23%
🇨🇿 Czech Republic12%24%
🇪🇪 Estonia12%30%
🇳🇱 Netherlands12%19%
🇱🇹 Lithuania11%14%
🇮🇪 Ireland11%21%

Topping the list is Slovenia, considered by some the most crypto-friendly nation in the world. According to the survey, 18% of the country’s population has some sort of investment in it. Cyprus also ranks high in its crypto-friendly rank and hits an investment figure of 13%.

Also notable is the Grand Duchy of Luxembourg, which despite having a small population of 640,000 also has a strong reputation as a global financial hub. When it comes to crypto, 14% of the population owns or has owned the asset, relative to 36% for stocks, bonds, or funds.

Crypto Unpopularity?

In regards to the countries with lower levels of crypto investment, one observation is that they tend to be wealthier and more developed EU nations. Here’s how the nations at or below the 10% crypto-investment threshold rank:

CountryPopulation Investing in CryptoPopulation Investing in Traditional Assets
🇲🇹 Malta10%37%
🇸🇪 Sweden10%60%
🇬🇷 Greece10%11%
🇫🇮 Finland9%42%
🇭🇺 Hungary8%19%
🇷🇴 Romania8%12%
🇵🇱 Poland8%14%
🇱🇻 Latvia8%11%
🇪🇸 Spain8%27%
🇩🇰 Denmark8%36%
🇧🇪 Belgium6%32%
🇩🇪 Germany6%33%
🇮🇹 Italy6%31%
🇫🇷 France5%22%

At the “bottom” of crypto interest are France, Germany and Italy, also the EU’s largest economies. At a glance, this might suggest that citizens of stronger economies invest less in crypto.

However, it’s important to note that the countries with higher levels of crypto investment tend to have lower levels of wealth on average. Though less of their investors seem to engage in crypto trading, countries like France and Germany might have more comparable levels of crypto investment on a pure dollar-basis.

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