SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 14 March 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.In republication, South Africas Sovereign EDF measure, mentioned on page 2, was changed from 18% to 0.18%. In addition, the reason for the vulnerability of South Africas economy to the Fed rate hike was revised to the countrys persistent, although shrinking, current account deficit.Sovereign Risk ReportECB Bazooka Sparks Decline In European Sovereign Credit Risk; Cyprus SteadyOn March 10, the European Central Bank (ECB) took a series of radical steps in its latest attempt to address the regions economic stagnation and lack of inflation. ECB President Mario Draghi stressed that the region is not in deflation, but indicated that the risks of deflation have increased, driven by the slowing global economy and broader geopolitical risks. The ECB said it would expand its purchases of government bonds and other debt securities from ª60 billion to ª80 billion per month starting in April, cut its benchmark interest rate further into negative territory by 0.10% to -0.40%, drop its refinancing rate from 0.05% to zero, and introduce new four-year negative rate loans to banks. In response, market-based measures of credit risk for European countries rallied this past week (see Figure 1). Sovereign EDFTM (Expected Default Frequency)1 metrics, which measure the expected probability of default over a five-year horizon, improved in peripheral European countries. Another market-based credit measure, CDS-implied ratings, also improved, while bond spread-implied ratings remained steady2. The average bond spread-implied rating for European countries is A1, which is three notches above its average CDS-implied rating of Baa1 and...
