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Moody's Sovereign Risk Analysis Summary - February 22, 2016

Core Content

This report from Moody's Capital Markets Research provides an analysis of sovereign credit risk across various countries, focusing on Portugal and other European and Asia-Pacific nations. It evaluates how market-based indicators, such as the Expected Default Frequency (EDF) and Credit Default Swap (CDS) spreads, reflect the credit risk of governments.

Main Points

• Portugal's Sovereign Risk Increase:

  • The five-year Sovereign EDF for Portugal rose from 0.27% to 0.64%, driven by the increase in CDS spreads.
  • The one-year EDF increased from 0.01% to 0.07%, indicating a sharp rise in near-term credit risk.
  • The implied ratings have deteriorated significantly: one-year EDF moved from Aa1 to Ba2, and five-year EDF from Baa2 to Ba1.
  • The report notes that the increase in EDF does not necessarily reflect the full extent of risk deterioration but highlights the growing concern in the market.

• Market Context:

  • Portugal's rising sovereign risk is attributed to increased budget deficits, a slowing economy, and political instability.
  • The country's government has rolled back austerity measures, leading to higher public spending and a larger deficit.
  • Political instability has contributed to a high unemployment rate (12%) and a rise in support for leftist and populist parties.

• Comparison with Other Countries:

  • Portugal's CDS spread is higher than its neighbors (Italy: 150bps, Spain: 119bps, Ireland: 66bps), but lower than Greece (1,433bps).
  • The report includes a table of EDF and CDS spread data for multiple countries, showing the trends and changes in their sovereign risk metrics.

Key Information

• EDF and CDS Spread Trends:

  • Portugal: Five-year EDF increased by 37 bps (from 0.27% to 0.64%), while one-year EDF increased by 6 bps (from 0.01% to 0.07%).
  • China: Five-year EDF increased by 2 bps (from 0.32% to 0.37%).
  • Indonesia: Five-year EDF increased by 19 bps (from 0.50% to 0.69%).
  • Korea: Five-year EDF decreased by 5 bps (from 0.18% to 0.13%).
  • Japan: Five-year EDF decreased by 6 bps (from 0.15% to 0.09%).
  • Malaysia: Five-year EDF increased by 6 bps (from 0.39% to 0.45%).
  • Thailand: Five-year EDF increased by 6 bps (from 0.35% to 0.41%).

• Implied Ratings:

  • Portugal's one-year EDF implied a rating drop from Aa1 to Ba2, and five-year EDF from Baa2 to Ba1.
  • Other countries also show varying degrees of rating changes, reflecting their respective risk profiles.

• Economic and Political Factors:

  • The report emphasizes that economic stagnation and political instability are key drivers of increased sovereign risk in Portugal.
  • These factors are also influencing the credit risk of other countries, though to a lesser extent.

Summary Table

Conclusion

The report underscores the rising sovereign credit risk in Portugal, primarily due to fiscal and political factors. It also provides a comparative analysis of sovereign risk across other countries in Europe and Asia-Pacific, highlighting the varying degrees of risk and the impact of economic conditions on market-based risk indicators.