Implied Default Probabilities and Default Recovery Ratios: An Analysis of Argentine Eurobonds 2000-2002

Abstract

This paper calculates implied recovery rates and implied default probabilities in a risk neutral setting for Argentine US-Dollar Eurobonds during the Argentine crisis from 2000 to 2002. In a model which is related to Jarrow (1995), the hazard rate is modelled as risk neutral probability using the Gumbel probability distribution. The results show that implied probabilities roughly take five levels, allowing to cut the time frame analyzed into five periods. The jumps between the levels are associated with rating cuts in most cases. In 2000, the estimated location parameter of the Gumbel distribution makes a default event appear most probable after four to five years. Estimated recovery ratios range from above 50% in the beginning to an average of 25% in the endSovereign default, credit risk