Part 6/17:
Crucially, the credit default swap (CDS) market provides a market-based gauge of default risk, charging premiums to hedge against potential defaults. Interestingly, Canada, despite a triple-A rating, has a CDS spread much higher than the US, indicating market perceptions of risk beyond credit ratings alone.
Default Probability and Market Confidence
The risk of default isn't solely about sovereign incapacity but also about confidence. When markets sense deteriorating confidence—due to high debt levels, inflation fears, or political instability—yields tend to spike, and prices plummet. A failure to roll over debt, or a broad loss of trust, can trigger a rapid spiral toward default or currency collapse.