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UBS: Which Countries are at Greatest Risk of Default?


There has been a lot of talk lately about the global financial crisis and some of its possible repercussions.

Some analysts fear that the countries involved in the global meltdown will have no choice but to default on their debts. Others are hopeful that a solution will be reached before that happens.

“As the deadline for the EU summit approaches, markets are more hopeful of a solution to the European sovereign debt crisis,” writes Mamta Badkar of Business Insider. “EU leaders are considering temporarily doubling the euro bailout fund by letting the EFSF [European Financial Stability Facility] continue running after the European Stability Mechanism (ESM) becomes effective.”

And although the borrowing costs of countries like Italy and Portugal have declined slightly, the balance sheets of many eurozone (and non-eurozone) countries are extremely weak (and that's being generous).

To get an overview of just how bad off some of these countries really are, writers at Business Insider thought it would be interesting to pull data from UBS analyst Andrew Cates' aggregate balance sheet risk index.

“The factors that help determine balance sheet risk include credit market stress, high banking sector leverage as measured by loan-deposit ratios, and substantial public sector debt as a percentage of GDP,” Badkar explains.

However, and this is important to keep in mind, the aforementioned criteria are not the only factors that determine a country's risk of defaulting.

“Just as important as the country's ability to repay its debt, is its willingness to pay, and enact crucial structural reforms.”

Here is UBS' list of the countries with a high risk of defaulting:

[gallery link="file" order="DESC" columns="2"]

[Note: All data is for 2010. The Balance Sheet Risk index depends on several indicators that include public sector debt as a percent of GDP; loan to deposit ratio (which measures of banking sector stress); and credit to GDP ratio (which measures credit market stress). Credit market is the broader market through which companies try to raise funds through debt sales. It also includes indicators of external fragility, like current account balance to GDP ratio, and external debt to GDP ratio among others.]

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