CDS and default probabilities
A Credit Trader points out that uses the price of CDS or their spread across countries doesn’t necessarily tell you something about underlying default risk:
[O]ne shouldn’t look at CDS as a “default” trade. Though their pricing is clearly driven by the likelihood of default and the payout upon default, I can tell you that 99% of people buying CDS do not believe that the entity upon which they are buying protection will actually default. In this, they are similar to investors in stocks. People buy and sell stocks because they think the stock in question will increase or decrease in price. Same goes for CDS.