State Default Risk Levels

by: Bespoke Investment Group

On Monday we highlighted the recent spikes in default risk for some of the problematic European countries. So what has default risk for states done recently? We were able to track down 5-year CDS prices for 16 states, and we highlight their current prices in the table below. While California probably comes to mind as the state that's in the most trouble, Illinois actually has the highest default risk according to investors. To insure $10,000 worth of Illinois debt for 5 years, a buyer would have to pay $291.30 per year. The cost for California is only slightly lower at $287.20. Michigan ranks third, followed by New Jersey, New York, Nevada, and then Florida. Of the 16 states that we found CDS prices for, Texas, Virginia, Maryland, and Delaware have the lowest risk of default.

Below is a chart showing CDS prices for the 5 riskiest states in 2010. At the start of the year, California was by far the most expensive to insure, but Illinois' problems caused it to take the lead midway through the year. The two states have been fighting it out for the default risk lead over the past four months now. All states were basically trending lower from their mid-year default risk highs up until the last couple of weeks when sovereign debt worries in Europe drove up state CDS prices as well. The recent jumps have so far been nothing like we saw earlier in the year, however.

click to enlarge

Click to enlarge

The last chart shows the percentage change since the start of the year in the CDS prices of the 5 riskiest states. As shown, Illinois default risk is up the most in 2010 at 97%, followed by Michigan at 45%, New Jersey at 32%, New York at 26%, and California at 11%.

Click to enlarge