Credit Suisse Default Swaps Hit All Time High

It sounds quite bad, doesn't it? Almost like a default is all but imminent.

It's not. Credit default swap (CDS) spreads can be used to infer a probability of default. Per year this probability is roughly equal to the spread divided by 1 minus the recovery rate (RR). RR is known after the fact, obviously, but history shows it's in the neighborhood of 40%. 453 basis points is 0.0453, if we divide this by 0.6 we get 7.55%. That's not an insignificant number, but still, there's a 92.5% probability that Credit Suisse will not default this year.

Actually it's much higher than that. Those who sell default insurance need to make some money. If you look at history, the probability of default you can calculate out of the CDS market is at least 10 times higher than the historical probability of default. So, in reality the probability that CS would default this year is less than 1%. Actually it is much, much less, because CS is too big to fail. It is considered a globally systemically important bank, or G-SIB [1]. What that means is that in exchange a for higher level of regulatory scrutiny the regulators will bail it out.

[1] https://en.wikipedia.org/wiki/List_of_systemically_important...

Can someone smarter than me back-work these prices into an implied probability of an actual default?