Debt
Countries with the Highest Default Risk in 2022
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.
| Country | Rank | Government Bond Yield (%) | 5Y CDS Spread | Interest Expense (% of GDP) | Government Debt (% of GDP) |
|---|---|---|---|---|---|
| 🇸🇻 El Salvador | 1 | 31.8% | 3,376 bps (33.76%) | 4.9% | 82.6% |
| 🇺🇦 Ukraine | 8 | 60.4% | 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.
Markets
Visualized: U.S. Corporate Bankruptcies On the Rise
In 2023, over 400 companies have folded. This graphic shows how corporate bankruptcies are growing at the second-fastest rate since 2010.
Visualized: U.S. Corporate Bankruptcies on the Rise
In March, Silicon Valley Bank collapsed, plunging its parent company SVB Financial Group into bankruptcy a week later.
While many expected a wave of bank failures to follow, much of this has since been averted—but cracks have begun to emerge with Moody’s recent downgrading of 10 small and mid-sized banks.
Across the wider corporate landscape, bankruptcies have begun to tick higher. Overstretched balance sheets coupled with 11 interest rate hikes since last year have added to mounting challenges for companies across many sectors.
This graphic shows the surge in corporate bankruptcies in 2023 based on data from S&P Global.
U.S. Corporate Bankruptcies Grow
So far in 2023, over 400 corporations have gone under. Corporate bankruptcies are rising at the fastest pace since 2010 (barring the pandemic), and are double the level seen this time last year.
Below, we show trends in corporate casualties with data as of July 31, 2023:
| Year of Filing | Bankruptcy Filings as of July | Annual Total |
|---|---|---|
| 2023 | 402 | N/A |
| 2022 | 205 | 373 |
| 2021 | 256 | 408 |
| 2020 | 407 | 639 |
| 2019 | 334 | 590 |
| 2018 | 317 | 518 |
| 2017 | 305 | 520 |
| 2016 | 354 | 576 |
| 2015 | 292 | 525 |
| 2014 | 273 | 471 |
| 2013 | 349 | 558 |
| 2012 | 362 | 586 |
| 2011 | 364 | 634 |
| 2010 | 530 | 827 |
Represents public or private companies with public debt where either assets or liabilities are greater than or equal to $2 million, or private companies where assets or liabilities are greater than or equal to $10 million at time of bankruptcy.
Firms in the consumer discretionary and industrial sectors have seen the most bankruptcies, based on available data. Historically, both sectors carry significant debt on their balance sheets compared to other sectors, putting them at higher risk in a rising rate environment.
Overall, U.S. corporate interest costs have increased 22% annually compared to the first quarter of 2021. These additional costs, combined with higher wages, energy, and materials, among others, mean that companies may be under greater pressure to cut costs, restructure their debt, or in the worst case, fold.
Billion-Dollar Bankruptcies
This year, 16 companies with over $1 billion in liabilities have filed for bankruptcy. Among the most notable are retail chain Bed Bath & Beyond and the parent company of Silicon Valley Bank.
| Company | Primary Sector | Date |
|---|---|---|
| Party City | Consumer Discretionary | Jan 2023 |
| Serta Simmons Bedding | Consumer Discretionary | Jan 2023 |
| Avaya | Information Technology | Feb 2023 |
| Diamond Sports | Communication Services | Mar 2023 |
| SVB Financial | Financials | Mar 2023 |
| LTL Management | N/A | Apr 2023 |
| Bed Bath & Beyond | Consumer Discretionary | Apr 2023 |
| Whittaker, Clark & Daniels | N/A | Apr 2023 |
| Monitronics | Industrials | May 2023 |
| Kidde-Fenwal | Consumer Discretionary | May 2023 |
| Envision Healthcare | Healthcare | May 2023 |
| Diebold | N/A | Jun 2023 |
| Wesco Aircraft | Industrials | Jun 2023 |
| PGX Holdings | Industrials | Jun 2023 |
| Cyxtera | Information Technology | Jun 2023 |
| Voyager Aviation | Industrials | Jul 2023 |
Mattress giant Serta Simmons filed for bankruptcy early this year. It once made up nearly 20% of bedding sales in America. With a vast share of debt coming due this year, the company was unable to make payments due to higher borrowing costs.
What Comes Next?
In many ways, U.S. corporations have been resilient despite the sharp rise in borrowing costs and economic uncertainty.
This can be explained in part by stronger than anticipated profits seen in 2022. While some companies have cut costs, others have hiked prices in an inflationary environment, creating buffers for rising interest payments. Still, S&P 500 earnings have begun to slow this year, falling over 5% in the second quarter compared to last year.
Secondly, the structure of corporate debt is much different than before the global financial crash. Many companies locked in fixed-rate debt over longer periods after the crisis. Today, roughly 72% of rated U.S. corporate debt has fixed rates.
At the same time, banks are getting more creative with their lending structures when companies get into trouble. There has been a record “extend and amend” activity for certain types of corporate bonds. This debt restructuring is enabling companies to keep operating.
The bad news is that corporate debt swelled during the pandemic, and eventually this debt will come due likely at much higher costs and with more severe consequences.
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