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Moody's Sovereign Risk Report Summary - 21 March 2016

Core Content

This report from Moody's Capital Markets Research (CMR) discusses the trends in sovereign risk across various countries in 2016, focusing on the Expected Default Frequency (EDF) and the implications of market signals on sovereign risk assessments.

Main Points

Global Sovereign Risk Trends

• Overall Trend: On average, sovereign risk measures have trended lower in 2016.
• EDF Improvement: Of the 69 countries in the EDF database, more than two-thirds saw a decline in EDF, with most increases limited to a few basis points.
• Exceptional Cases: Only five sovereign EDFs increased by 10 basis points or more.
• Average Improvement: The average sovereign EDF improved by 12 basis points since the start of the year.

South America

• Regional Trend: All South American sovereigns improved since the start of the year.
• Key Drivers: The Market Sharpe Ratio and CDS spreads on government bonds both contributed to lower EDFs.
• Brazil:
  • EDF: Improved from 2.45% in September 2015 to 0.70% in 2016, with an implied rating of Ba2 to Ba2 (three notches higher).
  • CDS Spread: Narrowed from 499 to 358 basis points.
  • Market Sharpe Ratio: Increased from 0.52 to 0.77.
  • Market Performance: Despite economic and political challenges, financial markets began to improve in 2016.
    • Stock Market: Sao Paulo IBX Index rose 15% since the start of 2016.
    • Currency: Recovered from a 33% drop against the US dollar in 2015.
  • Government Bond Yields: Declined, indicating improved market sentiment.

Asia-Pacific

• Country-Specific Data:
  • Australia: EDF (1-Year) and (5-Year) remained stable; CDS implied rating improved by one notch.
  • China: EDF (5-Year) decreased by 3 basis points; bond implied rating improved.
  • Hong Kong: EDF (5-Year) decreased by 1 basis point.
  • Indonesia: EDF (1-Year) increased by 3 basis points; EDF (5-Year) decreased by 4 basis points.
  • Japan: EDF (5-Year) decreased by 2 basis points.
  • Korea: EDF (5-Year) decreased by 5 basis points; bond implied rating improved by 3 notches.
  • Malaysia: EDF (5-Year) decreased by 12 basis points; bond implied rating improved by 1 notch.
  • Philippines: EDF (5-Year) decreased by 4 basis points; bond implied rating improved by 1 notch.
  • Thailand: EDF (5-Year) decreased by 4 basis points; CDS implied rating improved.

Europe

• Country-Specific Data:
  • Austria: EDF (5-Year) decreased by 3 basis points; CDS implied rating improved.
  • Belgium: EDF (5-Year) decreased by 3 basis points; CDS implied rating improved by one notch.
  • Bulgaria: EDF (5-Year) decreased by 22 basis points; bond implied rating improved by 2 notches.
  • Croatia: EDF (5-Year) decreased by 15 basis points; CDS implied rating improved by one notch.
  • Cyprus: EDF (5-Year) decreased by 113 basis points; CDS implied rating improved by 2 notches.
  • Denmark: EDF (5-Year) decreased by 1 basis point; CDS implied rating decreased by 6 notches.
  • Estonia: EDF (5-Year) decreased by 4 basis points.
  • Finland: EDF (5-Year) decreased by 1 basis point; CDS implied rating decreased by 6 notches.
  • France: EDF (5-Year) decreased by 6 basis points.
  • Germany: EDF (5-Year) decreased by 1 basis point.
  • Greece: EDF (1-Year) and (5-Year) decreased significantly by 285 and 457 basis points respectively.
  • Hungary: EDF (5-Year) decreased by 4 basis points.
  • Iceland: EDF (5-Year) decreased by 42 basis points; bond implied rating improved.
  • Ireland: EDF (5-Year) decreased by 2 basis points; CDS implied rating improved.
  • Italy: EDF (5-Year) decreased by 13 basis points.
  • Latvia: EDF (5-Year) decreased by 8 basis points; CDS implied rating improved.
  • Lithuania: EDF (5-Year) decreased by 9 basis points; CDS implied rating improved.
  • Netherlands: EDF (5-Year) decreased by 1 basis point; CDS implied rating decreased.
  • Norway: EDF (5-Year) increased by 1 basis point; CDS implied rating decreased.
  • Poland: EDF (5-Year) increased by 4 basis points.
  • Portugal: EDF (5-Year) increased by 21 basis points.
  • Romania: EDF (5-Year) decreased by 6 basis points.

Key Information

• EDF: A measure of the probability of default for a country, derived from market data.
• CDS Spreads: Reflect market perceptions of credit risk; lower spreads indicate lower perceived risk.
• Implied Ratings: Derived from EDF and CDS spreads, providing market-based credit assessments.
• Bond Implied Ratings: Reflect the creditworthiness of government bonds based on market data.
• Senior Ratings: Official ratings from Moody's Investors Service, separate from market-based CMR ratings.

Conclusion

The report highlights that, despite ongoing economic and political challenges in some regions, market indicators for sovereign risk have generally improved in 2016, suggesting a more optimistic outlook for many countries. This improvement is attributed to factors such as better market sentiment, lower CDS spreads, and increased investor confidence. However, some countries, like Greece and Portugal, still show signs of increased risk.