What is the risk of European sovereign debt defaults? Fiscal space, CDS spreads and market pricing of risk

► Fiscal space and macroeconomic factors are important determinants of sovereign risk. ► Risk-pricing of Euro Periphery is not predicted accurately in or out of sample. ► We match the Euro periphery group with five middle income countries outside Europe. ► Euro's Periphery default risk is priced much higher than matched countries in 2010.