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Moody's Sovereign Risk Report Summary

Core Content

This report from Moody's Analytics discusses the sovereign credit risk of various countries, focusing on the United Kingdom and other regions in the Asia-Pacific and Europe. It highlights how market uncertainty and political developments affect credit risk metrics such as the Expected Default Frequency (EDF) and implied ratings.

Main Points

• UK Sovereign Credit Risk Increase:

  • The UK's Sovereign EDF increased from 0.079% to 0.091%, close to the peak following the Brexit vote.
  • The rise is attributed to fears of a "Hard Brexit", which could lead to trade restrictions and reduced foreign investment.
  • The UK has a large current account deficit, making it vulnerable to such economic shocks.
  • The British pound fell to $1.24, its lowest since 1985, and the Bank of England may need to raise interest rates if the trend continues.
  • The UK's banking sector also saw an increase in credit risk, with the average probability of default rising from 1.09% to 1.16%.
  • There is a strong correlation (0.65) between the UK's sovereign EDF and the credit risk of its largest banks since 2013.

• Other European Countries:

  • Spain and Ireland saw sharp declines in their Sovereign EDF.
  • Slovakia and Hungary experienced increases in their five-year EDF by 18% and 17%, respectively.
  • Greece had a significant drop in its five-year EDF from 3.63% to 3.37%, with a one-year EDF decrease from 1.29% to 1.11%.
  • Italy and Portugal showed increases in their EDF metrics, with Italy's 5-year EDF rising by 15 bps and Portugal's 5-year EDF rising by 58 bps.
  • Belgium and France saw mixed changes, with some EDF metrics rising and others declining.
  • Germany had a slight increase in its five-year EDF by 1 bps, while Netherlands and Denmark showed minimal changes.
  • Croatia and Latvia also experienced declines in their EDF metrics.

• Asia-Pacific Region:

  • Australia had stable EDF metrics, with a slight decline in the 5-year EDF by 2 bps.
  • China saw a slight increase in the one-year EDF by 1 bps, while its five-year EDF remained relatively stable.
  • Hong Kong had a significant decline in its five-year EDF by 6 bps, and its senior rating remained unchanged.
  • Indonesia showed a small decline in the five-year EDF by 11 bps, with stable CDS implied ratings.
  • Japan and Korea had minor declines in their five-year EDF metrics, but Japan's CDS implied rating increased by 1.
  • Malaysia and New Zealand saw slight declines in their EDF metrics.
  • Philippines and India had small increases in their five-year EDF metrics, but India's senior rating remained stable.
  • Thailand and Vietnam had minor declines in their EDF metrics, with Vietnam's senior rating remaining unchanged.

Key Information

• Sovereign EDF is a metric that measures the probability of default over a five-year period.
• CDS Implied-Rating is derived from credit default swap (CDS) prices and reflects market expectations of credit risk.
• Bond Implied-Rating is based on bond yields and is used to assess the creditworthiness of a country.
• Senior Rating refers to the highest rating assigned to a country by Moody's Investors Service.
• The report emphasizes the relationship between sovereign credit risk and the financial sector, particularly in the UK, where the sovereign EDF and bank credit risk are closely linked.

Conclusion

The report highlights the impact of political and economic uncertainty on sovereign credit risk across the UK and several European and Asia-Pacific countries. The UK's "Hard Brexit" fears are the primary driver of its increased sovereign risk, while other countries exhibit mixed trends. The analysis underscores the importance of monitoring EDF and implied ratings to assess the credit risk of sovereign entities in a dynamic market environment.