SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 11 July 2016ContactsIrina Baron Asst Dir-Research Associate irina.baron@moodys.comXian Li 212-553-1404Senior Research Analyst xian.li@moodys.comABOUT CAPITAL MARKETS RESEARCHAnalyses from Moodys Capital Markets Research, Inc. (CMR) focus on explaining signals from the credit and equity markets. The publications address whether market signals, in the opinion of the groups analysts, accurately reflect the risks and investment opportunities associated with issuers and sectors. CMR research thus complements the fundamentally-oriented research offered by Moodys Investors Service (MIS), the rating agency.CMR is part of Moodys Analytics, which is one of the two operating businesses of Moodys Corporation. Moodys Analytics (including CMR) is legally and organizationally separated from Moodys Investors Service and operates on an arms length basis from the ratings business. CMR does not provide investment advisory services or products.View the CMR FAQ Contact the CMR team Follow us on TwitterMoodys Analytics markets and distributes all Moodys Capital Markets Research, Inc. materials. Moodys Capital Markets Research,Inc. is a subsidiary of Moodys Corporation. Moodys Analytics does not provide investment advisory services or products.For further detail, please see the last page.Sovereign Risk ReportBrexit Fears Linger in European Sovereign Debt Markets European Sovereign EDF (Expected Default Frequency)1 metrics, were once again on the rise over the past week after reverting back to their levels before the dramatic spike on June 24 (shown in Exhibit 1 below). Sovereign EDF measures of 27 out of 33 European counties deteriorated by the end of this past week as worries over the political uncertainty in the UK and Brexit implications dominated the news. The UKs Sovereign EDF measure, which measures the probability of default over the next five years, worsened noticeably. The countrys market-based probability of default rose from 0.08% to 0.10% over the past week, exceeding the immediate post-vote peak of 0.09% on June 24.Political uncertainty looks set to continue, with the UK Conservative Party not expected to announce its next party leader (and the countrys next prime minister) until early September. In an attempt to shore up the countrys financial system and the broader economy, the Bank of England has eased capital requirements for lenders by reducing the so-called countercyclical capital buffer to zero. The banks Governor Mark Carney also said that the benchmark rate would need to be cut over the summer. The British pound plunged to $1.282, its lowest since 1985, before recovering to $1.295 on July 8.Exhibit 1Five-year Sovereign EDF measures of selected European countries (%)Source: CreditEdgeMOODY'S ANALYTICS SOVEREIGN AND SUPRANATIONAL2 11 July 2016 Sovereign Risk Report: Brexit Fears Linger in European Sovereign Debt MarketsBrexits impact is evident in the cred...
