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Summary of Brazil and UK Sovereign Credit Risk Measures

Core Content

This report from Moody's Analytics analyzes the divergence in sovereign credit risk measures between Brazil and the United Kingdom, highlighting the impact of political and economic events on market perceptions of risk. It also includes a detailed overview of market-based credit risk measures for several countries in the Asia-Pacific and Europe regions.

Key Points

• Market-Based Risk Measures: Market-based measures of sovereign credit risk were generally flat to slightly lower over the past week. Over 70% of the 70 countries in the Sovereign EDF database saw their measures decline.

• Political Uncertainty: Political uncertainty is the key factor driving investors' perceptions of credit risk in both Brazil and the UK, though the effects have been different in each country.

• Brazil's Sovereign EDF:

  • The Sovereign EDF for Brazil peaked at 2.45% in September 2015 and decreased to 0.58% as of May 13, 2016.
  • Despite political and economic turbulence, including the impeachment of President Dilma Rousseff and a recession, the market has shown a positive outlook.
  • The climb in oil prices contributed to the improvement in Brazil's Sovereign EDF.
  • The Sao Paulo IBX Index increased by 24% since the start of 2016, and the Brazilian Real began to recover against the US dollar.

• UK's Sovereign EDF:

  • The UK's Sovereign EDF increased from 0.02% to 0.07% since October 2015.
  • The June 2016 EU referendum caused significant jitters, with the first-quarter GDP growth slowing to 0.4% and the Manufacturing PMI dropping to 49.2.
  • The Bank of England kept interest rates at a record low of 0.5% and warned about the economic risks of an EU exit.
  • UK's banking sector, highly correlated with the Sovereign EDF, saw its CDS-implied EDF measures rise from 0.47% to 0.96%.

Divergence in Risk Perceptions

• Brazil and the UK have shown contrasting trends in their sovereign credit risk measures due to different political and economic contexts.
• The decline in Brazil's Sovereign EDF suggests a more optimistic market view, while the increase in the UK's indicates heightened concerns, especially post-referendum.

Asia-Pacific Overview

Europe Overview

Main Insights

• Brazil: The decline in Sovereign EDF indicates improved market sentiment, despite political and economic challenges. This is attributed to the government's stability and the rise in oil prices.
• UK: The increase in Sovereign EDF reflects the market's concerns over the EU referendum and potential economic fallout.
• Market Correlation: The UK banking sector shows a strong correlation with the Sovereign EDF, indicating that investors are closely watching for any signs of economic instability.
• Other Countries: Most countries in the Asia-Pacific and Europe regions showed stable or slightly declining Sovereign EDF measures, suggesting a more positive market outlook compared to the UK. However, some countries like Greece and Portugal showed higher risk levels, indicating market concerns.

Key Takeaways

• Political and economic stability significantly influence market perceptions of sovereign credit risk.
• Brazil and the UK have shown divergent trends in their Sovereign EDF measures, highlighting the impact of different events on investor confidence.
• The report provides a detailed analysis of market-based credit risk measures across various countries, offering insights into current financial market sentiments.