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Moody's Sector In-Depth Summary: Greece and Europe, June 29, 2015

Core Content

This report from Moody's Capital Markets Research provides an analysis of the sovereign credit risk and market reactions in the context of Greece's ongoing debt negotiations and broader European economic conditions.

Key Points

Greece and Eurozone Dynamics

• Debt Negotiations: Greece faces a critical deadline for a $1.7 billion debt repayment to the IMF on June 30. Despite recent concessions by Prime Minister Alexis Tsipras, the negotiations have stalled, leading to a planned referendum on July 5th.
• Sovereign EDF: Greece's Sovereign Expected Default Frequency (EDF) remains at 5.73% as of June 26, the fourth highest in the dataset, indicating high default risk.
• Market Impact: The European financial markets have not been significantly affected by the Greek standoff, as investors have already priced in the possibility of a negative outcome.
• ECB and Capital Controls: The ECB decided not to extend its Emergency Liquidity Assistance (ELA) loans, and Athens imposed capital controls and bank closures to prevent capital flight.
• Market Reactions: European equity and bond markets initially showed gains, but dropped by 2.6% after the referendum announcement. Greece's 10-year bond yield rose to 14.7%, much higher than European peers.

Eurozone Economic Indicators

• Inflation: The Eurozone's inflation rate rose to 0.3% in May, slightly above zero, with services and food prices contributing to the increase.
• PMI: The Markit Composite PMI for the Eurozone rose to 54.1 in June, indicating economic expansion. Germany and France showed notable improvements.
• Unemployment: The unemployment rate in the Eurozone slightly decreased from 11.2% in March to 11.1% in April.

Regional Sovereign Risk

• Italy: The country saw a significant improvement in its Sovereign EDF, decreasing from 0.03% to 0.02%.
• Spain and Portugal: Their EDF measures declined from 0.020% and 0.029% to 0.012% and 0.018%, respectively.
• Comparison with Latin America: The average EDF for the Eurozone is 1.69%, which is higher than Latin America's 1.07%.

Global Market Risk Metrics

• Sharpe Ratios: Global market Sharpe ratios increased, showing a rise in risk premium required for sovereign exposure.
• Investment Grade vs. Below Investment Grade: The Sharpe ratio for investment grade sovereigns increased from 0.45 in December 2014 to 0.48 as of June 26, 2015. For below investment grade, it rose from 0.64 to 0.68.
• Crises Levels: Despite the increase, current Sharpe ratios are still below 2012 crisis levels.

Asia-Pacific Overview

Europe Overview

Summary

The report highlights the ongoing challenges Greece faces in its debt negotiations and the potential for a default, which could impact the broader Eurozone. Despite these concerns, the Eurozone's economic indicators show some resilience, with inflation rising slightly and the Composite PMI indicating growth. The region's Sovereign EDF measures have not seen a significant rise, suggesting that the market has already accounted for the risk. In contrast, the global Sharpe ratios have increased, reflecting higher risk premiums for sovereign exposure. The Asia-Pacific region shows relatively low sovereign risk, with most countries maintaining stable EDF measures and ratings.