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Moody's Market Signals Sovereign Risk Report Summary

Core Content

This report from Moody's Capital Markets Research provides an analysis of market-based credit risk signals across various regions, including Latin America, Asia-Pacific, and Europe. It highlights the credit risk measures, such as Sovereign EDF™ (Expected Default Frequency), CDS-implied ratings, and Bond-implied ratings, and evaluates how these indicators reflect the financial health and risk profiles of sovereign entities.

Main Points

• Argentina:

  • Argentina's Sovereign EDF increased to 5.7% as of July 4, marking the highest global one-year default risk.
  • The country missed a coupon payment, triggering a 30-day grace period and increasing the risk of default.
  • The US Supreme Court ruling forced Argentina to pay holdout creditors before restructured ones, which led to a spike in its EDF measure.
  • The country faces severe economic slowdown, high inflation, and a significant drop in foreign exchange reserves.
  • The yield spread on Argentina's bonds due 2017 has widened to over 1,300 bp, and CDS spreads have increased from 1,745 bp to 1,916 bp.

• Venezuela:

  • Venezuela has been a key driver of elevated Latin American credit risk.
  • The region's average Sovereign EDF is 0.66%, which is seven times higher than Europe's 0.10%.

• Chile:

  • Chile's Sovereign EDF is the lowest in the region at 0.03%, indicating relatively low credit risk.

• Russia and Ukraine:

  • Ukraine's Sovereign EDF increased from 0.12% to 0.13% due to the end of a cease-fire and increased political instability.
  • The Russian ruble-US dollar exchange rate declined to 34.4 rubles per USD, contributing to inflation.
  • Russia's Sovereign EDF is 0.13%, corresponding to an A3 rating, while its CDS and Bond-implied ratings are Ba2 and Ba1, respectively.
  • Moody's assigned a negative outlook to Russia's Baa1 government bond rating due to economic and geopolitical risks.

• Asia-Pacific:

  • Australia: Sovereign EDF remains stable at 0.01%, with CDS-implied ratings fluctuating and Bond-implied ratings consistently at Aaa.
  • China: Sovereign EDF is 0.04%, with CDS-implied ratings at Baa2 and Bond-implied ratings at A3.
  • Hong Kong: Sovereign EDF is 0.02%, with CDS-implied ratings at A2 and Bond-implied ratings at Aa3.
  • Indonesia: Sovereign EDF increased slightly to 0.10%, with CDS-implied ratings fluctuating and Bond-implied ratings at Baa1.
  • Japan: Sovereign EDF remains at 0.02%, with CDS-implied ratings at A1 and Bond-implied ratings at Aaa.
  • Malaysia: Sovereign EDF is 0.04%, with CDS-implied ratings at Baa2 and Bond-implied ratings at Baa1.
  • Philippines: Sovereign EDF is 0.05%, with CDS-implied ratings fluctuating and Bond-implied ratings at Baa1.
  • Sri Lanka: Sovereign EDF is 0.26%, with CDS-implied ratings at B3 and Bond-implied ratings at B1.
  • Vietnam: Sovereign EDF is 0.10%, with CDS-implied ratings at Ba3 and Bond-implied ratings at Ba2.

Key Information

• Sovereign EDF™ is a forward-looking probability of default derived from CDS spreads, adjusted for loss-given default and the market price of risk.
• CDS-implied ratings and Bond-implied ratings are alternative measures of credit risk that are often lower than the Sovereign EDF measure.
• Market Implied Ratings (MIS) are distinct from the research conducted by CMR and are not investment advisory services.
• Moody's Analytics markets and distributes all CMR materials and is legally separate from the ratings business.
• Moody's Capital Markets Research complements the fundamental analysis provided by Moody's Investors Service.
• Economic and political factors significantly influence the credit risk measures, particularly in countries like Argentina and Russia.
• Currency fluctuations, inflation, and debt servicing costs are critical factors in assessing sovereign risk.
• The report highlights the impact of geopolitical tensions on credit risk, such as the situation in Ukraine and its effect on Russia's credit profile.

Summary Table

Conclusion

The report underscores the elevated credit risk in several countries, particularly Argentina and Venezuela, due to economic instability, missed payments, and geopolitical tensions. It also notes that while some countries like Chile and Japan show lower risk, others such as Greece and Cyprus face significant challenges, with their EDF measures and ratings reflecting heightened default risk. The analysis provides a snapshot of current market sentiments and highlights the importance of monitoring these signals for investors and policymakers.