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Moody's Sovereign Risk Report Summary

Core Content

This report from Moody's Capital Markets Research (CMR) provides an analysis of sovereign credit risk trends across different regions, focusing on changes in the Expected Default Frequency (EDF) metrics and implied ratings over a specific period. The report highlights how sovereign risk has evolved in response to economic and political conditions, as well as market signals.

Main Points

• Market Response to Fed Rate Hike: The report mentions that the Federal Reserve's minutes suggested a potential rate hike as early as the March 14-15 meeting. However, market-based credit risk measures showed mixed results, indicating that the threat of rate hikes did not significantly impact sovereign risk metrics.

• Asia-Pacific Region:

  • The average Sovereign EDF declined by 6.27% over the past week.
  • Thailand, India, and China experienced the largest declines in their Sovereign EDF measures.
  • China's Sovereign EDF dropped from 0.37% to 0.34% due to government actions addressing economic slowdown and trade tensions.
  • Indonesia's Sovereign EDF (5-Year) fell by 33 bps, and its CDS Implied-Rating improved by +1.
  • Vietnam's Sovereign EDF (5-Year) decreased by 3 bps, showing some stability.

• LatAm Region:

  • Recorded a 3.14% weekly drop in average risk.
  • Mexico, Peru, and Chile showed the strongest weekly improvements.

• Middle East & Africa Region:

  • Experienced a 2.17% decline in average Sovereign EDF.
  • Egypt, Watar, and Algeria led the decline in the region.

• Europe:

  • European Sovereign EDFs increased by an average of 2.07%.
  • France and Portugal were the main drivers of the increase, with France's EDF rising by 14% and Portugal's by 9%.
  • Greece had a significant increase in both Sovereign EDF (1-Year: +5 bps, 5-Year: +54 bps), indicating heightened risk.
  • Italy saw a notable rise in Sovereign EDF (5-Year: +40 bps), reflecting economic and political challenges.

Key Information

• Sovereign EDF (Expected Default Frequency) is a measure of the expected probability of default over a one-year time horizon.
• CDS Implied-Rating reflects the market's assessment of credit risk through credit default swap (CDS) pricing.
• Bond Implied-Rating is derived from bond market data and indicates the creditworthiness of a sovereign entity.
• Senior Rating refers to the credit rating assigned by Moody's Investors Service (MIS) to sovereign entities.

Regional Summary

Asia-Pacific

• Australia: Sovereign EDF (1-Year) remained stable, while Sovereign EDF (5-Year) decreased by -3 bps.
• China: Sovereign EDF (5-Year) decreased by -8 bps, showing improvement in risk assessment.
• Hong Kong: Sovereign EDF (5-Year) decreased by -5 bps, with a stable Senior Rating.
• Indonesia: Sovereign EDF (5-Year) decreased by -33 bps, and CDS Implied-Rating improved by +1.
• Japan: Sovereign EDF (5-Year) decreased by -2 bps, and CDS Implied-Rating increased by +2.
• Korea: Sovereign EDF (5-Year) decreased by -1 bps, with a stable Senior Rating.
• Malaysia: Sovereign EDF (5-Year) decreased by -16 bps, with some improvement in CDS Implied-Rating.
• Philippines: Sovereign EDF (5-Year) decreased by -9 bps, and Bond Implied-Rating showed some decline.
• Thailand: Sovereign EDF (5-Year) decreased by -30 bps, indicating a significant improvement.
• Vietnam: Sovereign EDF (1-Year) decreased by -2 bps, with a slight improvement in CDS Implied-Rating.

Europe

• Austria: Sovereign EDF (5-Year) increased by +3 bps, with some improvement in CDS Implied-Rating.
• Belgium: Sovereign EDF (5-Year) increased by +2 bps, and CDS Implied-Rating decreased by -1.
• Bulgaria: Sovereign EDF (5-Year) decreased by -16 bps, with a slight improvement in CDS Implied-Rating.
• Croatia: Sovereign EDF (5-Year) decreased by -2 bps, with a slight increase in CDS Implied-Rating.
• Cyprus: Sovereign EDF (5-Year) increased by +36 bps, showing a significant rise in risk.
• Czech Republic: Sovereign EDF (5-Year) remained stable, with a slight improvement in Bond Implied-Rating.
• Denmark: Sovereign EDF (5-Year) increased by +2 bps, and CDS Implied-Rating decreased by -2.
• Estonia: Sovereign EDF (5-Year) decreased by -3 bps, with a stable Senior Rating.
• Finland: Sovereign EDF (5-Year) increased by +3 bps, and CDS Implied-Rating decreased by -1.
• Iceland: Sovereign EDF (5-Year) decreased by -4 bps, with some improvement in Bond Implied-Rating.
• Ireland: Sovereign EDF (5-Year) increased by +12 bps, and CDS Implied-Rating decreased by -3.
• Latvia: Sovereign EDF (5-Year) decreased by -3 bps, with a stable Senior Rating.
• Lithuania: Sovereign EDF (5-Year) decreased by -3 bps, with a slight decline in Bond Implied-Rating.
• Netherlands: Sovereign EDF (5-Year) increased by +5 bps, and Bond Implied-Rating decreased by -4.
• Norway: Sovereign EDF (5-Year) increased by +1 bps, with a slight improvement in CDS Implied-Rating.
• Poland: Sovereign EDF (5-Year) decreased by -5 bps, with a stable Senior Rating.
• Portugal: Sovereign EDF (5-Year) increased by +70 bps, indicating a significant rise in risk.
• Romania: Sovereign EDF (5-Year) decreased by -4 bps, with a stable Senior Rating.
• Russia: Sovereign EDF (5-Year) decreased by -14 bps, and CDS Implied-Rating increased by +3.
• Serbia: Sovereign EDF (5-Year) increased by +15 bps, showing a rise in risk.
• Slovakia: Sovereign EDF (5-Year) remained stable, with a stable Senior Rating.

Conclusion

The report highlights that sovereign credit risk varied across regions, with the Asia-Pacific and LatAm regions showing improvements in risk metrics, while Europe, particularly France and Portugal, faced increased risks. The changes in EDF and implied ratings reflect market sentiment and the underlying economic and political conditions of each country.