SOVEREIGN AND SUPRANATIONALSECTOR IN-DEPTH 12 December 2016ContactsGlenn Levine 212-553-9595Assc Dir-Sr Research Analyst glenn.levine@moodys.comXian Li 1.212.553.1404Senior 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 ReportItalys Sovereign Credit Risk Recedes Following Referendum Italys sovereign credit risk measure declined in the week ended December 9 following the failed referendum on December 4. The countrys five-year EDF (Expected Default Frequency)1, which is derived primarily from CDS spreads on the governments outstanding bonds, dipped from 0.67% at the start of the week to 0.60% on Thursday, before finishing the week at 0.63%. The five-year CDS spread eased from 183 to 170 bp over course of the week. Apparently investors were somewhat reassured by the relative lack of financial reaction to the Italian voters disapproval. The referendum result was both decisive and unsurprising - any adverse economic or financial effects were already priced in by the time of the vote. The five-year EDF metric for Italy maps to an implied rating of Ba2, putting it three notches below the Moodys Investors Service (MIS) rating of Baa2. MIS downgraded the outlook on Italys sovereign debt from stable to negative following the referendum.Exhibit 1Italys One- and Five-Year Sovereign EDF Measures (%)Source: CreditEdgeMOODY'S ANALYTICS SOVEREIGN AND SUPRANATIONAL2 12 December 2016 Sovereign Risk Report: Italys Sovereign Credit Risk Recedes Following ReferendumItalys sovereign EDF measures trended higher in the weeks leading up to the referendum as it became increasingly likely that the proposed constitutional changes would not be approved. Prime Minister Matteo Renzi had called for the referendum and promised to step down in the event that it was rejected he resigned mid-week. The co...
