For the market, Venezuela is at more risk of default than Spain

Spain is the epicenter of the crisis in the euro zone with an economy stricken by recession, the fast losing popularity of the administration of Prime Minister Mariano Rajoy after the painful expense cut and growing signals of the need for rescue. Nevertheless, the market regards Venezuela as more prone to be unable to honor its debt (default).

CDS (Credit Default Swap) are the thermometer to measure the risk of insolvency. In global finance, such instruments work as insurance.

Basically, the holders of a bond from Venezuela or Spain intending to shield themselves from noncompliance by the governments of these countries at the maturity date, buy sort of insurance policy, the CDS.

Investors pay an annual amount; for valuable consideration, they are certain that if the governments of Spain or Venezuela declare themselves unable to fulfill their commitments, the company that acts as the insurer will be liable for the payment of the bond.

If what investors' fear does not occur, and at the expiration date of the bond, they get their money back, the insurer will have as profits the payments received on an annual basis.

Based on the price of the CDS, Venezuela started the day on Monday as the third most risky country in the world, only after Cyprus and Argentina. In the meantime, Spain ranks fifth.

The CDS, vouching for a one-million dollar bond expiring in five-year term, issued by Venezuela, is traded at 9.3%. That is, investors must pay the insurer USD 93,000 yearly, whereas a Spanish bond in the same terms and conditions ought to pay only USD 59,000.

vsalmeron@eluniversal.com