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Moody's Sovereign Risk Report Summary (23 February 2015)

Core Content

This report from Moody's Analytics provides an analysis of credit risk across various regions, focusing on the Sovereign EDF™ (Expected Default Frequency) and other market-based indicators. It highlights how market participants assess the risk of default for sovereign entities and the implications of political and economic developments on these assessments.

Key Regions and Trends

Europe

• Ukraine: The Sovereign EDF increased sharply from 10.93% to 19.77%, nearly doubling, due to ongoing political instability and conflict in the east. Despite a ceasefire agreement, tensions have escalated, with pro-Russian separatists capturing strategic areas. Ukraine's credit risk remains the second-highest among sovereign entities, following Venezuela.
• Russia: Sovereign EDF improved slightly from 0.58% to 0.51%, indicating reduced risk perception. However, the country's risk is still higher than the European average.
• Greece: The Sovereign EDF dropped from 5.86% to 4.1%, showing significant improvement. This follows a compromise to extend the bailout by four months. Market optimism remains, but the deal was rejected by Germany initially, and further reforms are required for additional funding.

Latin America

• The region experienced the largest weekly drop in average credit risk (24%).
• Venezuela, Uruguay, and Brazil showed the strongest improvements in their Sovereign EDF measures.
• Despite the overall decline, the region still has the highest sovereign credit risk globally.

Asia-Pacific

• Malaysia, Korea, and China saw the greatest declines in Sovereign EDF measures.
• Venezuela remains the top risk in the dataset with a 20.15% one-year Sovereign EDF.

Middle East & Africa

• Turkey, South Africa, and Israel led the region in reducing credit risk, with an average decline of 2% in Sovereign EDF.

Key Market Indicators

• Ukraine's Sovereign EDF: Increased to 19.77%, the highest in five years.
• Ukraine's Bond Prices: Notes maturing in 2023 dropped from 54 to 45 since the ceasefire agreement.
• Ukraine's CDS Spread: Widened from 3,485 bp on February 12 to 6,870 bp on February 20, indicating higher perceived default risk.
• Greece's Sovereign EDF: Improved from 5.86% to 4.1%.
• Greece's Bond Yield: Declined from 10.74% to 9.89%, reflecting improved market sentiment.

Key Economic Impacts

• Ukraine: Continued conflict has led to economic disruption, including a 5.5% GDP contraction forecast, higher than the previous 4.4% estimate. The budget deficit is expected to reach 4.1% of GDP, up from 3.7% in December. Foreign currency reserves have fallen from $17.8 billion in May 2014 to $6.4 billion in January 2015.
• Greece: The government submitted a request for a bailout extension, which was initially rejected by Germany. A compromise was reached, allowing a four-month extension, but further economic reforms are needed to unlock additional funds.

Summary of Ratings and Market Perceptions

• Moody's Capital Markets Research (CMR) focuses on market-based signals rather than fundamental analysis.
• CMR is part of Moody's Analytics, which operates separately from the ratings business.
• Sovereign EDF and CDS implied ratings are used to gauge market perception of default risk.
• The report emphasizes that market participants are increasingly concerned about the ability of sovereigns to manage economic and political risks, especially in regions like Ukraine and Greece.

Conclusion

The report highlights the significant increase in Ukraine's credit risk due to ongoing conflict and political instability, while Greece saw a notable improvement following a compromise on its bailout. Other regions such as Latin America, Asia-Pacific, and Middle East & Africa showed mixed trends, with some countries experiencing a decline in default risk and others remaining stable or showing slight improvements. Overall, the European market showed the largest deterioration in credit risk, with Ukraine being the standout case of increased risk.