The dynamics of sovereign CDSs in some euro-area countries are studied, breaking them down into objective probability of default and risk premium; in addition, the relationship of these two components with some macroeconomic and financial factors is analysed. Finally, the difference between the values of CDSs stipulated under different contractual conditions (the ISDA basis) is used to determine the risk that the government bond may be redenominated in a different currency.
Sovereign CDS prices show a high contribution of the risk premium and depend mainly on financial variables (in particular, the stock prices of credit companies). Between May and November 2018, the redenomination risk premium of Italian government bonds was approximately double the corresponding objective probability; in times of tension, the contribution of redenomination risk to the default risk is greater compared with other countries in the euro area.
