Bloomberg
A measure of companies’ probability of default may provide an early signal of countries’ ability to repay debt and can be used as an alternative to sovereign credit ratings, according to Ed Altman, a professor at New York University’s Stern School of Business, who devised the metric.
Companies in Greece, which in May received a 110 billion-euro ($150 billion) bailout, had a 10.6 percent probability of default in April, the highest score among the 10 countries tracked by the so-called Z-metric. Portugal followed with a 9.4 percent score and Italy ranked third with an 8 percent probability. The numbers are likely to have worsened since then, Altman said in an interview in Milan yesterday.
“Sovereign ratings take into account a macro picture and don’t provide an early signal,” said Altman, who is also an adviser to Classis Capital Sim, a Milan-based fund manager. “This is a bottom-up approach.”
In June 2009, almost a year before the bailout, the Z-metric for Greece showed an 11.6 percent chance of default. Moody’s Investors Service cut Greece’s rating to non-investment grade this June, a month after the bailout, while Standard & Poor’s cut Greece to junk in April. Italy hasn’t suffered a rating cut from any agency since the start of the credit crisis.
Interesting concept, using a Z ratio to determine potential sovereign problems. Note the 2nd place nature of Portugal and Italy taking 3rd. The only problem is that the Z uses working capital etc., which is not relevant to financial firms which have caused (overtly) many of the problems we are experiencing today. Altman says he is looking at a Z for financials. Just another arrow in the quiver of market mavens and value seekers.
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