SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 10 October 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 ReportHard Brexit Anxiety Heightens Britains Sovereign Credit Risk Rising fears that the United Kingdom will quit the single market altogether in return for full control over its borders, a so-called Hard Brexit, were joined by a rise in the countrys sovereign credit risk. The UKs Sovereign EDFTM (Expected Default Frequency)1 metric, which measures the probability of default over a five year time horizon, had been gradually declining since July 2016 (Exhibit 1). However, a new wave of political uncertainty settled in over the past week, after Prime Minister Theresa May announced she would trigger Article 50 of the Lisbon Treaty by March, which will start a two-year countdown for the UKs formal exit from the EU. During that time the UK will have to negotiate a new economic and political relationship with Europe. This announcement contributed to the rise in the UKs market-based probability of default from 0.079% to 0.091%, a level close to the immediate post-Brexit vote peak of 0.097% on June 24. Interestingly, Sovereign EDF measures for other European countries were mixed over the past week. Spain and Ireland showed some of the sharpest weekly declines, while Slovakias and Hungarys five-year Sovereign EDF measures increased by 18% and 17%, respectively.MOODY'S ANALYTICS SOVEREIGN AND SUPRANATIONAL2 10 October 2016 Sovereign Risk Report: Hard Brexit Anxiety Heightens Britains Sovereign Credit RiskExhibit 1Five-Year Sovereign EDF Measures of Selected European Countries (%)Source: CreditEdgeThe rise in the UKs Sovereign EDF measure has been driven primarily by financial ma...
