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Moody's Sovereign Risk Analysis Summary (19 September 2016)

Core Content

Moody's Capital Markets Research (CMR) provides market-based credit risk assessments through metrics like the Sovereign EDF™ (Expected Default Frequency). These metrics are used to evaluate the probability of default over different time horizons and are not investment advisory services. CMR is part of Moody's Analytics, which operates independently from the ratings business of Moody's Investors Service (MIS).

Greece Sovereign Risk Analysis

• Reform Implementation: Greece's progress in implementing reforms required by the 2015 rescue package has been slow, with only two of 15 reforms completed.
• Bailout Funding: The first tranche of the third bailout package (€10.3 billion) was approved in May 2016, but only €7.5 billion has been disbursed so far, with the rest expected to be released in the current month.
• EDF Trends:
  • Greece's five-year Sovereign EDF declined from 4.8% to 2.8% in May 2016.
  • Over the past two weeks, it has risen from 3.4% to 3.9%, indicating growing concerns over credit risk.
• Credit Risk Concerns: Uncertainty about reform progress has affected the country's credit risk, with the Sovereign EDF rising.
• Next Meeting: The next Eurozone officials' meeting is scheduled for September 21.
• Market Reactions:
  • The Athens stock exchange fell by approximately 4%.
  • The five-year CDS spread widened by 91 bp.
  • The yield of Greece's 10-year government bonds increased by 50 bp to 8.6%, the highest among Eurozone peers.
  • Both CDS and bond spreads map to Caa2 on the MIS rating scale.
• PD Curve: The one-year EDF is well below the five-year EDF, indicating no imminent risk of default, despite the recent increase in credit risk.

Key Observations

• The five-year EDF for Greece's banking sector declined from 15% to 4.8% at the time of the financial aid payout, but has since risen to 7.65%, mirroring the trend in the Sovereign EDF.
• Non-performing exposures (NPEs) in Greece reached €116 billion, over half of the country's annual economic output.
• The country's unemployment rate is at 25%, the highest in Europe, contributing to the liquidity challenges in the banking sector.

Asia-Pacific Overview

Europe Overview

Main Points

• Reform Delays: Greece's slow implementation of reforms has raised concerns about the continuation of bailout disbursements.
• Credit Risk: The Sovereign EDF has shown recent volatility, reflecting uncertainty in the country's financial situation.
• Market Indicators: The Athens stock exchange and bond yields indicate increased market risk perception.
• PD Curve: The one-year EDF is below the five-year EDF, suggesting that investors are not overly concerned about short-term default risk.
• Banking Sector: The banking sector's EDF has mirrored the Sovereign EDF, indicating systemic risk concerns.
• Non-Performing Loans: High levels of non-performing exposures (NPEs) have contributed to the overall credit risk of the country.
• Comparative Analysis: The report includes a comparative analysis of Sovereign EDF and other metrics across various countries in Asia-Pacific and Europe.

Key Information

• EDF Metric: Measures the expected probability of default over a five-year time horizon.
• CDS Spread: Reflects the market's perception of default risk, with an increase indicating higher perceived risk.
• Bond Yield: The yield of Greece's 10-year government bonds has risen, indicating higher risk of default.
• Senior Rating: Indicates the highest credit rating assigned by Moody's.
• Market-Based Default Risk: These metrics reflect the market's view of default risk rather than fundamental analysis.

This summary provides an overview of the credit risk landscape for Greece and other countries in Asia-Pacific and Europe, highlighting key trends and market reactions.