Sovereign Credit Risk on the Decline

Though the politics of individual countries may continue to be in flux, sovereign credit risk appears to be on the decline, at least as measured during the week ending May 12.

The European Sovereign Expected Default Frequency (EDF), which measures the expected probability of default over a five-year time period by Moody’s Investors Service, dropped by an average of 2.44% on the heels of the European Commission’s (EC) report that economic growth in the eurozone is expected to expand 1.7% in 2017, a fractional increase from the forecast in February. According to Moody’s, the EC said that the perceived risk to the outlook has lessened due to the defeat of populist parties in France and the Netherlands.

“At the start of the year, the most pronounced threat to the future of the European Union was coming from countries that were once considered stalwarts,” said NACM Economist Chris Kuehl, Ph.D. “The British decision to withdraw was not all that unexpected given the frosty relationship the U.K. has long maintained with the rest of Europe, but the prospect of both the Netherlands and France pulling out had many declaring that the EU was a ‘dead man walking.’ As it turned out, both Geert Wilders and Marine Le Pen fell short and the EU was saved. At least that has been the general assessment from a relieved establishment in western Europe.”

Greece showed the largest improvement in the eurozone, with its Sovereign EDF declining from 3.08% to 2.82%, indicating that investors have some faith in the country’s ability to secure bailout money.

The Asia Pacific region’s Sovereign EDF declined by 0.51%, with South Korea’s decreasing from 0.18% to 0.17% as Moon Jae-in’s swearing in as president may ease political tensions with promises of relieving economic worries, improved relations with North Korea, and more balanced diplomacy with the U.S. and China, Moody’s said.

Latin America recorded the largest weekly drop in default probabilities, with Venezuela, Brazil and Chile marking notable improvements. In the Middle East and Africa region, Saudi Arabia, Nigeria and Turkey contributed to an average rise of 1.19% for the area’s Sovereign EDF.

– Adam Fusco, associate editor

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