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Moody's Sovereign Risk Analysis Summary: May 2015

Core Content

This document presents an analysis of sovereign risk across various countries, focusing on Greece as the primary subject. It highlights changes in market-based risk indicators, including the Sovereign EDF (Expected Default Frequency), CDS (Credit Default Swap) implied ratings, and bond implied ratings, from April to May 2015. The analysis is part of Moody's Capital Markets Research, which evaluates how market signals reflect risks and investment opportunities for sovereign entities.

Main Points

• Greece's Risk Improvement:

  • Market-based measures of Greek sovereign risk showed a decline in the week ending May 1st, 2015, after a period of increasing risk.
  • The one-year Sovereign EDF dropped from 6.58% to 5.65%, a 14% relative decline.
  • The five-year Sovereign EDF decreased from 5.93% to 5.28%.
  • The EDF-implied rating improved one notch from Caa3 to Caa2, though it remains in the speculative grade.
  • Greek stock markets rose 9% during the week, indicating improved investor sentiment.

• Key Factors Behind the Improvement:

  • Change in Negotiation Team: The previous Finance Minister, Yanis Varoufakis, was replaced with more pragmatic and experienced officials, leading to a more cooperative approach in negotiations with European creditors.
  • Shift in Government Policy: The Greek government shifted from grandstanding to implementing reforms, including resuming privatization efforts, such as selling the port of Piraeus, offloading its 49% share in the local gas transmission network, and leasing regional airports.
  • CDS Spread Narrowing: The five-year CDS spread narrowed from 2,731 basis points to 2,287, indicating a decrease in perceived risk.
  • Bond Yields Declined: The benchmark ten-year government bond yield fell to 10.47%, the lowest since early March, reflecting market optimism.

• Remaining Concerns:

  • Despite the improvement, Greece still faces a liquidity problem and may default if it cannot access the €7.2 billion in withheld bailout funds.
  • Markets remain skeptical about Greece's ability to repay its debts in full, and it remains the fourth riskiest sovereign EDF, behind Ukraine, Venezuela, and Argentina.

Key Information

• Moody's Analytics: It is part of Moody's Corporation and operates separately from Moody's Investors Service, which provides ratings.
• Sovereign EDF: A measure used to estimate the probability of a country defaulting on its debt.
• CDS Implied-Rating: Reflects the market's view of the creditworthiness of a sovereign based on CDS spreads.
• Bond Implied-Rating: Indicates the market's assessment of a country's credit risk through bond yields.
• Senior Rating: A separate rating provided by Moody's Investors Service, reflecting the creditworthiness of a country based on fundamental analysis.

Summary of Changes (May 1st, 2015)

Conclusion

While Greece's sovereign risk indicators improved temporarily, the document suggests that this may not indicate a long-term recovery. The government's shift to more pragmatic policies and the positive market reaction suggest some progress, but underlying financial challenges and market skepticism remain. The analysis emphasizes that Greece is still among the riskiest sovereigns, and the situation requires continued monitoring.