Assuming that the current value of the cost of default equals the excess
price of assumedly risk-free 10y German bonds over the 10y bonds of other
euronations today we get
Portugal
Spread b.p. 1057
Default recovery rate % 35
Maturity years 10
Default prob. % 100.39
i.e. assuming a default recovery rate of 35% the market are certain that
Portugal will default.
For Italy a 50% default recovery rate yields
Italy
Spread b.p. 370
Default recovery rate % 50
Maturity years 10
Default prob. % 61.85
which isn't exacly reassuring either.
Also the following is interesting:
Greece
Spread b.p. 3100
Default recovery rate % 5
Maturity years 10
Default prob. % 100.52
The markets, who already know that Greece has defaulted, think that the recovery rate will be just 5%.
