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Moody's Sovereign Risk Report Summary: Brexit Uncertainty and Credit Risk Trends

Core Content

This report from Moody's Analytics, dated 4 April 2016, discusses the impact of Brexit uncertainty on the United Kingdom's sovereign credit risk. It highlights the rise in market-based probability of default measures and provides a comparative analysis of sovereign risk across various countries in the Asia-Pacific and Europe regions.

Key Findings

United Kingdom

• Sovereign EDF (5-Year): The UK's five-year Sovereign EDF measure has more than doubled since October 2015, rising from 0.029% to 0.081%.
• Market Reaction: The UK's credit risk eased slightly over the past week due to a global market rally following Janet Yellen's speech on the slower pace of future rate increases.
• Brexit Impact: Investors remain concerned about the economic and financial market disruptions from a potential UK exit from the EU, which could reduce foreign investment and increase borrowing costs.
• Current Account Deficit: The UK's current account deficit widened from €92.9 billion in 2014 to €97.3 billion in 2015, adding to the concerns.
• Banking Sector Correlation: The UK's Sovereign EDF has been highly correlated with the EDF of its three largest banks since 2013, with a correlation of 0.65. The rise in the country's EDF preceded the rise in the credit risk of its banks.

Asia-Pacific

• Australia: The 5-year Sovereign EDF measure decreased by 2 bps to 0.06%, while the CDS implied rating remained Aa3.
• China: The 5-year Sovereign EDF measure decreased by 2 bps to 0.30%, and the CDS implied rating remained Baa3.
• Hong Kong: The 5-year Sovereign EDF measure decreased by 2 bps to 0.12%, with a Senior Rating of Aa1.
• Indonesia: The 5-year Sovereign EDF measure remained stable at 0.58%, and the Bond Implied-Rating increased to A2.
• Japan: The 5-year Sovereign EDF measure decreased by 1 bps to 0.09%, with a Senior Rating of A1.
• Korea: The 5-year Sovereign EDF measure decreased by 2 bps to 0.12%, and the Bond Implied-Rating increased by 3 to Aa3.
• Malaysia: The 5-year Sovereign EDF measure decreased by 5 bps to 0.39%, with a Senior Rating of Aa3.
• Philippines: The 5-year Sovereign EDF measure decreased by 6 bps to 0.58%, and the Bond Implied-Rating increased by 3 to A2.
• India: The 5-year Sovereign EDF measure decreased by 16 bps to 0.44%, with a Senior Rating of A3.
• Thailand: The 5-year Sovereign EDF measure decreased by 0 bps to 0.18%, and the Senior Rating remained A3.
• Vietnam: The 5-year Sovereign EDF measure decreased by 1 bps to 0.38%, with a Senior Rating of B1.

Europe

• Austria: The 5-year Sovereign EDF measure decreased by 3 bps to 0.05%, and the Senior Rating remained Aa2.
• Belgium: The 5-year Sovereign EDF measure decreased by 2 bps to 0.06%, with a Senior Rating of Aa2.
• Bulgaria: The 5-year Sovereign EDF measure decreased by 18 bps to 0.47%, and the Senior Rating remained Baa3.
• Croatia: The 5-year Sovereign EDF measure decreased by 21 bps to 0.20%, with a Senior Rating of Ba1.
• Cyprus: The 5-year Sovereign EDF measure decreased by 101 bps to 3.09%, and the Senior Rating decreased by 2 to Caa3.
• Denmark: The 5-year Sovereign EDF measure decreased by 1 bps to 0.03%, with a Senior Rating of A1.
• Estonia: The 5-year Sovereign EDF measure decreased by 3 bps to 0.13%, with a Senior Rating of A1.
• Finland: The 5-year Sovereign EDF measure decreased by 1 bps to 0.05%, with a Senior Rating of Aa3.
• France: The 5-year Sovereign EDF measure decreased by 6 bps to 0.06%, with a Senior Rating of Aa2.
• Germany: The 5-year Sovereign EDF measure decreased by 1 bps to 0.03%, with a Senior Rating of Aaa.
• Greece: The 5-year Sovereign EDF measure decreased by 37 bps to 3.09%, with a Senior Rating of Caa3.
• Hungary: The 5-year Sovereign EDF measure decreased by 4 bps to 0.20%, with a Senior Rating of Baa2.
• Iceland: The 5-year Sovereign EDF measure decreased by 37 bps to 0.24%, with a Senior Rating of Baa2.
• Ireland: The 5-year Sovereign EDF measure decreased by 2 bps to 0.14%, with a Senior Rating of Baa1.
• Italy: The 5-year Sovereign EDF measure decreased by 6 bps to 0.36%, with a Senior Rating of Baa2.
• Latvia: The 5-year Sovereign EDF measure decreased by 6 bps to 0.18%, with a Senior Rating of A3.
• Lithuania: The 5-year Sovereign EDF measure decreased by 7 bps to 0.17%, with a Senior Rating of A3.
• Netherlands: The 5-year Sovereign EDF measure decreased by 2 bps to 0.04%, with a Senior Rating of Aaa.
• Norway: The 5-year Sovereign EDF measure increased by 1 bps to 0.04%, with a Senior Rating of Aaa.
• Poland: The 5-year Sovereign EDF measure increased by 2 bps to 0.21%, with a Senior Rating of A2.
• Portugal: The 5-year Sovereign EDF measure increased by 20 bps to 0.48%, with a Senior Rating of Ba1.
• Romania: The 5-year Sovereign EDF measure decreased by 5 bps to 0.28%, with a Senior Rating of Baa3.
• Russian Federation: The 5-year Sovereign EDF measure decreased by 59 bps to 0.50%, with a Senior Rating of Ba1.
• Serbia: The 5-year Sovereign EDF measure decreased by 1 bps to 0.48%, with a Senior Rating of B1.

Main Points

• The UK's sovereign credit risk remains elevated due to Brexit uncertainty.
• The Sovereign EDF measure is a key indicator used to assess credit risk.
• The global market rally influenced a slight easing of UK credit risk.
• The banking sector is closely linked to sovereign credit risk, with a strong correlation observed.
• The report includes data on credit risk for multiple countries across different regions, showing varied trends and changes.

Conclusion

Moody's report highlights the ongoing uncertainty and elevated credit risk for the UK due to the Brexit referendum, emphasizing the correlation between sovereign and banking sector risk. It also provides a comparative analysis of credit risk across various countries, showing both increases and decreases in Sovereign EDF measures and their implications on market perception and investment opportunities.