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Moody's Sovereign Risk Report Summary (April 6, 2015)

Core Content

This report provides an analysis of market-based sovereign risk measures for various countries, focusing on the Expected Default Frequency (EDF) and CDS Implied-Ratings. It highlights the volatility and trends in sovereign risk across different regions, particularly in Europe and Asia-Pacific.

Main Points

Greece

• Sovereign EDF (1-Year): Rose from 3.48% to 6.86% by the end of the week, a net increase of 639 basis points.
• Reasons for Risk Increase: The Greek government faced financial constraints, with a looming IMF loan deadline and unresolved debt crisis. The new Syriza-led government struggled with balancing domestic political demands and creditor requirements.
• CDS Implied-Rating: Remained at C throughout the week, indicating a very high risk of default.
• Bond Implied-Rating: Dropped from Caa2 to Caa3, reflecting deteriorating market sentiment.

Russia

• Sovereign EDF (1-Year): Continued to decline, dropping from 0.41% to 0.35%, a 16% proportional decrease.
• Five-Year EDF: Fell from 0.75% to 0.67%, down from a peak of 1.37% in late January.
• Reasons for Risk Decline: Improved sentiment due to the ceasefire with Ukraine, reducing the likelihood of further sanctions. Oil prices stabilized at around $55 per barrel, and the ruble rose by 23% from its February low.
• CDS Implied-Rating: Dropped from Caa1 to B3, indicating reduced default risk.
• Bond Implied-Rating: Declined from B1 to Ba2, showing a more pessimistic outlook.

Brazil

• Sovereign EDF (1-Year): Fell from 0.23% to 0.19%, a 17% relative decline.
• Reasons for Risk Decline: The decline was seen as a near-term correction following a prolonged increase, not due to specific news.
• Economic Outlook: Brazil's EDF remains elevated due to a weak economy and pending fiscal adjustments that have not yet passed Congress.
• CDS Implied-Rating: Remained at Baa3, suggesting moderate risk.
• Bond Implied-Rating: Dropped from Baa2 to Baa1, indicating a slight improvement in market sentiment.

Uruguay

• Sovereign EDF (1-Year): Declined from 0.24% to 0.20%.
• Economic Context: Uruguay's sovereign risk moves in tandem with Argentina and Brazil. Its largest export market is Brazil, and the country's weakening economy is affecting its risk profile.
• Public Debt: At around 67% of GDP, but expected to stabilize as the budget approaches balance.

Asia-Pacific Overview

• Australia: Sovereign EDF remained stable at 0.01% for the one-year measure. CDS Implied-Rating fluctuated, with a +1 change in the 12-month period.
• China: Sovereign EDF slightly decreased to 0.04%, with a -1bps change over the last 12 months.
• Hong Kong: One-year EDF rose to 0.02%, with a -2 change in the 12-month period.
• Indonesia: One-year EDF remained at 0.08%, with a -4 bps change over the last year.
• Japan: One-year EDF was stable at 0.01%, with a -2 bps change over the past year.
• Korea: One-year EDF was stable at 0.02%, with a -1bps change over the last 12 months.
• Philippines: One-year EDF remained at 0.08%, with a -2 bps change over the past year.
• Sri Lanka: One-year EDF decreased to 0.21%, with a -10 bps change over the last year.
• Taiwan: One-year EDF was not available, but the Senior Rating remained at Aa3.
• Thailand: One-year EDF was stable at 0.05%, with a -3 bps change over the last year.
• Vietnam: One-year EDF remained at 0.08%, with a -4 bps change over the past year.

Key Information

• Moody's Capital Markets Research (CMR): Provides market-based analyses of credit and equity signals. It complements fundamental research from Moody's Investors Service.
• Moody's Analytics: Operates independently from the ratings business and does not offer investment advisory services.
• EDF Trends: Greece showed significant volatility and increased risk, while Russia and Brazil saw declines in their EDFs.
• CDS and Bond Implied-Ratings: These metrics reflect market expectations of credit risk and are used to gauge the perceived risk of sovereign debt.
• Economic Factors: Political instability, fiscal adjustments, and external factors such as trade and sanctions significantly influence sovereign risk measures.

Conclusion

The report underscores the importance of monitoring market-based sovereign risk indicators like EDF and CDS implied ratings to understand the credit risk associated with different countries. Greece remains a high-risk area due to ongoing political and economic challenges, while Russia and Brazil have seen some relief in risk measures, indicating improved market sentiment and economic stability. Other countries in the Asia-Pacific and Europe show relatively stable or minor changes in their risk profiles, suggesting a more favorable outlook.