11/1/19: Euromoney on U.S. and Global Credit Risk: 2018 in review

My comment on key trends in the U.S. credit risk changes in 2018 and a glimpse into 2019 'crystal ball' for Euromoney and ECR: https://www.euromoney.com/article/b1cmrkm17q1cm9/ecr-survey-results-2018-us-decouples-from-improving-g10-trend-angola-egypt-lead-africa-recovery.

29/3/18: Credit downgrades and the sunny horizons of peak growth

The global economy is picking up steam. The U.S. economy is roaring to strength. 2018 is going to be another 'peak year'. Tax cuts are driving equity valuations up. Corporate balance sheets are getting healthier by a day... and so on.

The positivity of recent headline has been contrasted by the realities of the gargantuan bubble in corporate debt. A bubble that is not going to get any healthier any time soon. In fact, based on the latest data (through 4Q 2017) from the S&P Global Market Intelligence, H1 2017 trend toward relatively balanced (or rather relatively moderately negative skew) credit ratings has turned decisively negative in 2H 2017. Worse, 4Q 2017 dynamics were markedly worse than 3Q 2017 dynamics:

Which brings up the following question: if things are getting downgraded that fast, what's likely to happen with the Fed policy 'normalization' impact on the corporate credit markets? Answers on tears-proof napkins, please.

12/1/18: Euromoney Credit Risk Survey of 2017

Euromoney Country Risk survey for 2017 is out with comments from, amongst others, myself: (https://www.euromoneycountryrisk.com/Analysis/ECR-survey-results-2017-EMs-back-in-vogue-as-global-prospects-soar-?LS=Adestra64171_&utm_source=Adestra&utm_medium=email&utm_term=&utm_content=ECR%C2%A0%20Q4%202017%20Survey%20Results%20-%20Emerging%20markets%20back%20in%20vogue%20as%20global%20prospects%20soar&utm_campaign=ECR%20Weekly%20Round%20Up%2012%20Jan%202018)

11/6/16: Sovereign to Corporate Risk Spillovers

As noted recently in my posts on the new iteration in the Greek Crisis, we are now into the sixth year (officially) of the Euro area sovereign debt crisis. Alas, of course by unofficial, yet more realistic metrics, we are really into the ninth year of the crisis (who cares what you call it).

Now, you might just think that at the present, there is little to worry about, as the crisis seemed to have abated, if not completely gone away. But the problem is that the real lesson from the 2008-present crisis should be exactly the acquired awareness that such thinking is dangerous.

Here’s why. In a recent ECB working paper,  Augustin, Patrick and Boustanifar, Hamid and Breckenfelder, Johannes H. and Schnitzler, Jan, titled “Sovereign to Corporate Risk Spillovers” (January 18, 2016, ECB Working Paper No. 1878: http://ssrn.com/abstract=2717352) “quantify significant spillover effects from sovereign to corporate credit risk in Europe” in the wake of the announcement of the first Greek bailout on April 11, 2010.

“A ten percent increase in sovereign credit risk raises corporate credit risk on average by 1.1 percent after the bailout. These effects are more pronounced in countries that belong to the Eurozone and that are more financially distressed. Bank dependence, public ownership and the sovereign ceiling are channels that enhance the sovereign to corporate risk transfer.”

We should worry.

1) Corporate and sovereign bond risks are tied at a hip. And guess what we are witnessing today? A massive bubble in sovereign bonds and a bubble in corporate bonds. When one blows, the other will too. Be warned, per my contribution to the Summer edition of Manning Financial (LINK HERE).

2) Eurozone countries are at a greater contagion risk. Doh… like we never heard that before. But, still, good reminder to remember. I wrote a paper on that for the EU Parliament not long ago (LINK HERE).

3) Bank dependence is bad for contagion - in a sense that it increases contagion, not reduces it. And guess what the Eurozone been doing lately via ECB’s policy and via CMU and EBU? Right… increasing bank dependency. (LINK HERE)

In short, things might be a bit brighter today than they were yesterday, but tomorrow might bring another hurricane.

9/9/2014: Russia's Risks are Up, but Still Vastly Outperforming Ukraine's

Earlier today I tweeted about the drop in the drop in the credit risk score for Russia in the Euromoney Country Risk survey. As always, one has to look at the scores in both time series context and comparative to the peer economies.

Here is the Russian score in time series context:

It is worth noting that Russian score has declines rather steadily over time, but remains well ahead the regional average for the Eastern and Central Europe. Part of Russian score decline is driven by the ECE trend, but part is idiosyncratic.

Here are the main components of the score and the direction:

The sea of read arrows is what is of greater concern - scores dropping across all categories surveyed except one: debt indicators.

For comparative, the chart below shows evolution of Ukraine score, which is much less benign than that of Russia and remains deep under-performer in the Eastern and Central Europe:

Table below (click to enlarge) shows cross-countries comparatives for score and main components for Russia's main non-EU neighbours:

At the bottom of the above table, I list countries that are in 'credit risk' proximity to Russia, Ukraine, Belarus and Moldova. One thing is clear: Russia is comparing favourably to Eastern European countries that are EU members. Ukraine, Belarus and Moldova - do not. Their proximates are least-developed countries of the region.

4/1/2014: Small downgrade for Russia in ECR survey

Euromoney Country Risk survey update for Russia out today is not a pleasant reading. Here are the details:

Overall score is down, signalling rising risk:

The risk factoring is still more benign than for a number of EU and some Euro area countries:

Recent trend is relatively stable, with some mild improvement on mid-2013:

But sub-scores and sub-factors are largely pointing South:

Overall, not a nice change... All scores in the above below 5.0 are of concern and those below 3.75-4.0 are of significant concern.

18/12/2013: Ireland's risk ratings improve: ECR

Euromoney Country Risk score for Ireland posted one of the largest increase of all countries surveyed in recent weeks. Here are the details:

Details of Ireland score upgrade:

 Note: ignore the glitch in data prior to June 2013.

Sub-factors of the Economic Assessment, Political Assessment and Structural Assessment scores:

11/10/2013: Euromoney Credit Risk Analysis: Q3 2013

The Euromoney Country Risk survey results are out for Q3 2013 and here is some analysis with a comment from yours truly. As usual, emphasis is mine:

"Some 101 of the 186 countries surveyed have succumbed to lower ECR scores (increased risk) since June, which, with 17 unchanged, leaves just 68 safer, according to the views of global economists and other country-risk experts surveyed during the third quarter."

Core global drivers:

• US federal shutdown & looming debt-ceiling deadline 
• Concerns about monetary tapering, and 
• Europe’s fiscal problems.

"... the shake-out that occurred in the wake of the collapse of Lehman Brothers in September 2008 has still left the majority of sovereigns – some 75% in all – with vastly increased risk levels than before the crisis; in the case of the eurozone periphery - Cyprus, Greece, Ireland, Italy, Portugal and Spain – an astonishing 25 to 50 points each."

Notice that in the above, Euro area shows the highest rate of deterioration of any region, save the CIS, and CIS deterioration is in part driven by links to the Euro area.

Per ECR: "US causing fewer flutters for G10 risk profile than Europe’s problems."

"Within the G10 group of leading industrialized nations, the US is not considered a particularly riskier prospect in spite of its latest political troubles. The world’s biggest economy has slipped to 17th in the rankings, but its score is still higher than at the start of the year."

In the case of Europe, core downward pressure drivers are:

• "The unwillingness to see the euro weaken", 
• "A banking sector still in need of repair",
• "Weak political resolve on budget issues"and 
• "Individual country economic prospects heading in different directions.”

Per ECR: "Indeed, greater concerns are reserved for 21st-placed France, with its fiscal targets missed and the economy remaining sluggish, as well as for Aaa-rated Sweden, in fifth spot, where a moribund economy and a government relaxing fiscal policy with tax cuts ahead of next year’s parliamentary election are gnawing away at the sovereign’s gold-plated creditworthiness."

"Both countries have seen their scores slip the most (by 0.7 points each since June), within a group where Germany is flat-lining as it awaits the formation of a new government..."

"In the European Union, 17 of its now 28 member states are riskier, whether compared with June or since the end of last year..."

"Remarkably, in spite of the recoveries witnessed in some of the bailout countries, notably Ireland and Portugal, the eurozone crisis is continuing to cause ripples, with no fewer than 10 of the 17 member states still succumbing to lower scores during Q3. This comes amid weak economies, excessively high unemployment rates, spikes in political risk, trade-weighted appreciation of the euro, and Greek borrowing concerns re-emerging to keep the region’s worst performer grounded on 34 points."

Notice Ireland's strong position second to Austria in terms of overall gains in the risk scores (lower risk).

"Constantin Gurdgiev, another ECR contributor, based in Dublin, says: “The changes in risk assessments broadly reflect improved sentiment across the euro area, consistent with both improved global growth outlook and internal regional stabilization in the wake of protracted sovereign debt and growth crises.

“[However] structural weaknesses and risks remain, with France presenting significant long-term risk due to the complete absence of serious efforts to reform the labour markets and address a chronic lack of investment in new enterprises formation.

“The US debt-ceiling uncertainty also presents a lower risk to the euro area economies than the longer-term upward pressure on US yields. As benchmark yields for the US and Germany deteriorate into 2014, there will be renewed pressure on funding excessive debt levels across the majority of the euro area economies, most notably for Greece, Italy, Portugal, Spain and Ireland, but also for Belgium and the Netherlands.”"

Apologies for shameless self-promotion... :-)

5/10/2013: Euromoney Country Risk: Italy v Spain

Euromoney Country Risk scores changes:

Notice-worthy:

• Improved score for Hungary driven by gains in Economic Assessment, Political Assessment and Structural Assessment
• Cyprus scores continue to deteriorate despite the claims from the Troika that the economy is close to 'stabilising'. Cyprus risk metrics are tanking at a rapid rate from 58.0 in March post-default rating to 52.1 only 6 months later.
• Spain is rated below Italy, but the two counter-moved in recent ratings, with scores differntials driven by the following:

The political cycle clearly disfavours Italy, but economic performance is on Italy's side.

Here's ECR's analysis on Italy v Spain, with comment from myself (you can click on slides to enlarge):

2/10/2013: Euro area sovereign crisis: predictable and reasonably priced?

• Can a model-based credit ratings system be used to predict future fiscal distress? Answer seems to be: yes.
• And have the fiscal downgrades of the euro area peripheral states been predictable in advance? Answer seems to be: yes.
• In other words, are the downgrades warranted by the actual pre-crisis dynamics in the economies? Answer seems to be: yes.
• Lastly, were there useful signals of stress build up that could have been considered by the policymakers prior to the onset of the crisis to alleviate or prevent the collapse of euro area peripherals? Answer seems to be: yes.

A new paper from CEPR (DP9665) titled "Sovereign credit ratings in the European Union: a model-based fiscal analysis" and authored by Vito Polito and Michael R. Wickens (September 2013: http://www.cepr.org/pubs/dps/DP9665) presents "a model-based measure of sovereign credit ratings derived solely from the fiscal position of a country: a forecast of its future debt liabilities, and its potential to use tax policy to repay these." [emphasis is mine]

The authors "use this measure to calculate credit ratings for fourteen European countries over the period 1995-2012. This measure identifies a European sovereign debt crisis almost two years before the official ratings of the credit rating agencies."

Ouch!

Now, the fourteen European (EU14) countries in the model-based calculations are Austria, Belgium, Denmark, Finland, France, Germany, Greece, Ireland, Italy, the Netherlands, Portugal, Spain, Sweden and the U.K.

So the main findings are: "…The model-based credit ratings:

1. Anticipate the downgrades of Ireland, Spain, Portugal and the U.K. that occurred from the end of the 2010s; 
2. Downgrade Greece to the lowest rating (coinciding with its highest default probability) from at least mid 2000; 
3. Suggest that the Italian sovereign credit rating has been overstated. 
4. For all other countries, the model-based credit ratings are similar, but not identical, to the credit ratings provided by the CRAs 

"An implication of these results is that the cross-section distribution of the model-based sovereign credit rating is no longer concentrated within the investment grade prior 2010 and it starts changing significantly from 2008. This suggests that a model-based credit rating would have identified and signalled to market participants signs of the impending European sovereign debt crisis well before 2010, when the CRAs first reacted to the crisis."

And the kicker: "A by-product of the methodology proposed in this paper is the quantification of a country's debt limit (measured as its maximum borrowing capacity) and how this changes over time. The numerical analysis suggests that for most EU14 countries the scope for increasing borrowing capacity by increasing taxation is limited as actual tax revenues are similar to tax revenues maximized with respect to tax rates."

In other words, we've run out of the road for taxing our way out of the crisis.

"Our findings suggest that EU14 countries are more likely to be able to raise debt limits and achieve fiscal consolidation by reducing their expenditures than by increasing taxes."

Any wonder? Ok, check out the first link here: http://trueeconomics.blogspot.ie/2013/10/2102013-low-tax-free-market-economy.html

20/9/2013: Ireland's Credit Risk Scores Improve Again

With some weak domestic economy figures out for Q2 2013, let's finish the week of Irish news with some positives. Euromoney Country Risk survey updates are in today and Ireland again posted improved scores:

Update: In a related news, Moody's put Ireland on stable outlook tonight: http://www.reuters.com/article/2013/09/20/us-ireland-moodys-outlook-idUSBRE98J10C20130920

13/9/2013: Ireland's risk ratings steady: ECR

Quick updates on country risk scores from Euromoney Country Risk surveys:

Higher scores imply lower risk. For comparative, Ireland currently is at 57.81. The global heat-map is:

You can click on image to enlarge.

And Ireland's risk assessment summary:

2/8/2013: Nice uptick in Ireland's risk ratings: ECR

Small thing, but all counts... Ireland's Euromoney Country Risk scores are continuing to improve:

Latest score up at 57.81 ranking Ireland at 42nd in terms of risk, with lower rank / higher score implying lower risk:

 Comparatives:

 Score components on aggregate:

 Historical trend:

Economic Assessment score sub-components:

Political Assessment score sub-components:

Structural Assessment score sub-components: