SlideShare une entreprise Scribd logo
1  sur  28
Sovereign Risk Analysis Nicolas Forest, Head of Interest Rate Strategy September 2010
How can we evaluate the sovereign risk ? Contradictory points of view Rating Agency Private companies analyze sovereign credit of each country based on political and economic risks. The rating is a public indicator of the solvency of each country Credit Scoring  Based on a cross-country analysis, a logistic regression could fit the current long term rating. A good expectations of different variables could help to anticipate the ratings changes Fundamental Analysis A rigorous analysis of each country independent of rating agencies is based on economic approach and fiscal simulations Market Valuation The bonds prices are defined by supply and demand and reflect an implied probability of default for each country
Sovereign Credit Ratings Sovereign ratings history 1900 Moody’s established issued its first sovereign rating  1920 Rating agencies rates an increasing number of sovereign Yankee bond issues 1929 Poor’s published rating of Yankee bonds issued by 21 national governments 1930 Sovereign defaults spiked during the 1930s depressions. By 1939, all European sovereign ratings were in the speculative grade 1940 Most ratings were suspended during the war with the exception of the Canada or the Usa 1963 Introduction of Interest Equalization Tax in the Usa and creation of European bonds market The best rating ‘AAAAA’ for Usa and ‘B’ for China and Greece By 1935, Standard rated Chile and Peru at ‘D’ and Germany and Japan in the low speculative grade By 1939, UK remained at ‘AA’ but Germany was downgraded to ‘D’ In 1968, S&P suspended all sovereign ratings except those on Canada and Usa which remained at ‘AAA’ Rating Agency
Sovereign Credit Ratings The ratings methodology ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Rating Agency
Sovereign Credit Ratings The ratings methodology Economic and growth prospects General government debt burden Monetary flexibility External liquidity Rating Agency
Sovereign Credit Ratings A chronology of European sovereign default 1820 1824 Greece 1840 1860 1880 1900 1920 1940 1960 1980 2000 1831 Spain 1834 Portugal 1867 Spain 1868 Austria 1876 Turkey 1892 Portugal 1893 Greece 1914 Austria 1915 Bulgaria Romania 1917 Russia 1932 Austria Bulgaria Germany 1940 Turkey 1981 Poland Romania 1978 Turkey 1983 Yugoslavia 1998 Ukraine Russia 2002 Moldova 1933 Yugoslavia Romania 1931 Hungary Great Recession in US & in Europe  Russia revolution and the first world war Defaults in Africa Defaults in Latin America Defaults in Latin America Rating Agency (worldwide)
Sovereign Credit Ratings An evaluation of credit rating Sample of involuntary debt restructurings Rating Agency
Internal Credit Rating Explanatory variables % of variables with missing values per country % of countries with missing values per variable Credit Scoring
Internal Credit Rating Logistic Regressions Distribution of long term foreign currency rating Cumulative Distribution of long term foreign currency rating Credit Scoring 3.940 0.032 0.008 -0.018 - Public Debt 51 123.630 0.000 0.187 1.177 + Corruption Perception Index (2009 Score) 50 9.379 0.000 0.144 0.573 - External debt stocks, total (DOD, current US$)* 46 7.088 0.000 0.029 0.110 + Current account balance (% of GDP) 37 13.312 0.002 0.038 -0.120 - Inflation, consumer prices (annual %) 26 43.986 0.014 0.024 0.060 + Gross domestic savings (% of GDP) 25 4.020 0.044 0.034 0.068 + Gross capital formation (% of GDP) 24 19.042 0.000 0.123 0.461 + Health expenditure, total (% of GDP) 3 5.507 0.001 0.775 2.526 + Economic Development 1  Deviance p-value S.E. Coeff. E.S. Variable Nr.
Internal Credit Rating Sovereign Rating of Netherlands  Credit Scoring
Internal Credit Rating Sovereign Rating of France  Credit Scoring
Internal Credit Rating Sovereign Rating of AAA countries Credit Scoring AAA AA The best AAA The questionable AAA The Expected AA
Internal Credit Rating Sovereign Rating of Argentina Credit Scoring
Internal Credit Rating Corruption Perception Index The CPI index as been created in 1995 and ranks today more than 150 countries in term of perceived levels of corruptions. There exits a clear relation between the corruption perception index and the long term rating  Credit Scoring
Market Valuation Does the credit rating explain the level of spread ? Market From a long term perspective, the  degradation of long term ratings coincides with a global spread widening… … but the relation is clearly less relevant on short term ! + - AAA AAA
Market Valuation Market Does the credit rating explain the level of spread ? + = - - +
Market Valuation Implied probability of a default Market Based on recovery value close to 50%, we can extract from the market the cumulative implied probability of default
Fundamental Analysis Liquidity and curve Market
Fundamental Analysis Specific Country Analysis ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],Analysis Netherlands
Fundamental Analysis Determination of a debt limit Analysis Behavior of the primary balance as function of debt At low levels, there is little response of the primary balance to rising debt As debt increases, the balance responds more vigorously When the level is too high, impact could decrease Interest rate schedule The interest rate schedule = (interest rate – growth) x debt ratio If we assume that growth is independent of the level of debt, the function is linear 1 2 3
Fundamental Analysis Fiscal Space valuation by IMF Analysis
Fundamental Analysis “ Why is a default unnecessary, undesirable and unlikely ?”  Analysis ,[object Object],[object Object],[object Object],[object Object],[object Object],The main arguments who argue that default is inevitable
Conclusion Investment opportunities Rating Agency Probability of default implied by ratings   Credit Scoring  Probability of default implied by internal ratings Fundamental Analysis What is the probability to expect a default ? Market Valuation Probability implied by the market Investment Strategies
[object Object]
Annex S&P Methodology
Annex Internal Model - Outputs
Addresses Luxembourg Dexia Asset Management Luxembourg SA 136, route d’Arlon 1150 Luxembourg Tel.: + 352 2797-1 Belgium Dexia Asset Management Belgium Place Rogier 11 B-1210 Bruxelles Tel.: + 32  02 222 11 11 France Dexia Asset Management SA 40, rue Washington 75408 Paris Cedex 08 Tel.: + 33 1 53 93 40 00 Switzerland Dexia Asset Management Luxembourg SA succursale de Genève 2, rue de Jargonnant 1207 Genève Tel.: + 41 22 707 90 00 The Netherlands Dexia Asset Management Nederlands bijkantoor Lichtenauerlaan 102-120 3062 ME Rotterdam Tel.: + 31 10 204 56 53 Germany Dexia Asset Management Luxembourg SA Zweigniederlassung Deutschland An der Welle 4 60422 Frankfurt Tel.: + 49 69 7593 8823 Australia Ausbil Dexia Ltd Veritas House – Level 23 207 Kent Street Sydney NSW 2000 Tel.: + 61 2 925 90 200 Italy Dexia Asset Management Luxembourg SA Succursale Italiana Corso Italia 1 20122 Milano Tel.: + 39 02 31 82 83 62 Spain Dexia Asset Management Luxembourg SA Sucursal en España Calle Ortega y Gasset, 26 28006 Madrid Tel.: + 34 91 360 94 75 Bahrain Dexia Asset Management Luxembourg S.A., Middle East Representative Office Bahrain Financial Harbour, Financial Center, West Harbour Tower, Level 23 King Faisal Highway PO Box 75766 Manama Tel.: + 973 1750 99 00 Canada Dexia Asset Management Luxembourg SA Canadian Representative Office 155, Wellington Street West 6th floor Toronto, Ontario M5V 3L3 Tel.: + 1 416 974 9055
Disclaimer Money does not perform. People do. ,[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object],[object Object]

Contenu connexe

Tendances

Aminullah assagaf ch.1 sd 5 financial management_ (22 okt 2020)
Aminullah assagaf ch.1 sd 5 financial management_ (22 okt 2020)Aminullah assagaf ch.1 sd 5 financial management_ (22 okt 2020)
Aminullah assagaf ch.1 sd 5 financial management_ (22 okt 2020)Aminullah Assagaf
 
Première Rencontre Terraequitas
Première Rencontre TerraequitasPremière Rencontre Terraequitas
Première Rencontre TerraequitasGroupeTerraEquitas
 
3 aminullah assagaf ch. 6 sd10_financial management_22 okt 2020
3 aminullah assagaf ch. 6 sd10_financial management_22 okt 20203 aminullah assagaf ch. 6 sd10_financial management_22 okt 2020
3 aminullah assagaf ch. 6 sd10_financial management_22 okt 2020Aminullah Assagaf
 
3 aminullah assagaf ch. 11 sd15_financial management_22 okt 2020
3 aminullah assagaf ch. 11 sd15_financial management_22 okt 20203 aminullah assagaf ch. 11 sd15_financial management_22 okt 2020
3 aminullah assagaf ch. 11 sd15_financial management_22 okt 2020Aminullah Assagaf
 
3 aminullah assagaf ch. 16 sd 21_financial management_22 okt 2020
3 aminullah assagaf ch. 16 sd 21_financial management_22 okt 20203 aminullah assagaf ch. 16 sd 21_financial management_22 okt 2020
3 aminullah assagaf ch. 16 sd 21_financial management_22 okt 2020Aminullah Assagaf
 
WHV '11AR_Final_PressQuality_Crop&Bleed
WHV '11AR_Final_PressQuality_Crop&BleedWHV '11AR_Final_PressQuality_Crop&Bleed
WHV '11AR_Final_PressQuality_Crop&BleedTlielaxu Miykel
 
Aminullah assagaf p610 ch. 6 sd10_financial management_28 mei 2021
Aminullah assagaf p610 ch. 6 sd10_financial management_28 mei 2021Aminullah assagaf p610 ch. 6 sd10_financial management_28 mei 2021
Aminullah assagaf p610 ch. 6 sd10_financial management_28 mei 2021Aminullah Assagaf
 
Tricumen / Rates markets: A perfect storm_200614
Tricumen / Rates markets: A perfect storm_200614Tricumen / Rates markets: A perfect storm_200614
Tricumen / Rates markets: A perfect storm_200614Tricumen Ltd
 
Tricumen / RWA dynamics FY11-FY14E_070115 open
Tricumen / RWA dynamics FY11-FY14E_070115 openTricumen / RWA dynamics FY11-FY14E_070115 open
Tricumen / RWA dynamics FY11-FY14E_070115 openTricumen Ltd
 
Austerity to save the banks
Austerity to save the banksAusterity to save the banks
Austerity to save the banksADEMU_Project
 
When Fiscal consolidation meets private deleveraging
When Fiscal consolidation meets private deleveragingWhen Fiscal consolidation meets private deleveraging
When Fiscal consolidation meets private deleveragingADEMU_Project
 
The 2009 Interest Rate Outlook
The 2009 Interest Rate OutlookThe 2009 Interest Rate Outlook
The 2009 Interest Rate Outlooknicoforest
 
Aminullah assagaf p1621 ch. 16 sd 21_financial management_28 mei 2021
Aminullah assagaf p1621 ch. 16 sd 21_financial management_28 mei 2021Aminullah assagaf p1621 ch. 16 sd 21_financial management_28 mei 2021
Aminullah assagaf p1621 ch. 16 sd 21_financial management_28 mei 2021Aminullah Assagaf
 
Global crisis2011
Global crisis2011Global crisis2011
Global crisis2011sadettin
 

Tendances (19)

Aminullah assagaf ch.1 sd 5 financial management_ (22 okt 2020)
Aminullah assagaf ch.1 sd 5 financial management_ (22 okt 2020)Aminullah assagaf ch.1 sd 5 financial management_ (22 okt 2020)
Aminullah assagaf ch.1 sd 5 financial management_ (22 okt 2020)
 
Première Rencontre Terraequitas
Première Rencontre TerraequitasPremière Rencontre Terraequitas
Première Rencontre Terraequitas
 
3 aminullah assagaf ch. 6 sd10_financial management_22 okt 2020
3 aminullah assagaf ch. 6 sd10_financial management_22 okt 20203 aminullah assagaf ch. 6 sd10_financial management_22 okt 2020
3 aminullah assagaf ch. 6 sd10_financial management_22 okt 2020
 
3 aminullah assagaf ch. 11 sd15_financial management_22 okt 2020
3 aminullah assagaf ch. 11 sd15_financial management_22 okt 20203 aminullah assagaf ch. 11 sd15_financial management_22 okt 2020
3 aminullah assagaf ch. 11 sd15_financial management_22 okt 2020
 
3 aminullah assagaf ch. 16 sd 21_financial management_22 okt 2020
3 aminullah assagaf ch. 16 sd 21_financial management_22 okt 20203 aminullah assagaf ch. 16 sd 21_financial management_22 okt 2020
3 aminullah assagaf ch. 16 sd 21_financial management_22 okt 2020
 
5. risk rating
5. risk rating5. risk rating
5. risk rating
 
WHV '11AR_Final_PressQuality_Crop&Bleed
WHV '11AR_Final_PressQuality_Crop&BleedWHV '11AR_Final_PressQuality_Crop&Bleed
WHV '11AR_Final_PressQuality_Crop&Bleed
 
Aminullah assagaf p610 ch. 6 sd10_financial management_28 mei 2021
Aminullah assagaf p610 ch. 6 sd10_financial management_28 mei 2021Aminullah assagaf p610 ch. 6 sd10_financial management_28 mei 2021
Aminullah assagaf p610 ch. 6 sd10_financial management_28 mei 2021
 
Lloyd's 2009 Annual Resuts
Lloyd's 2009 Annual ResutsLloyd's 2009 Annual Resuts
Lloyd's 2009 Annual Resuts
 
Tricumen / Rates markets: A perfect storm_200614
Tricumen / Rates markets: A perfect storm_200614Tricumen / Rates markets: A perfect storm_200614
Tricumen / Rates markets: A perfect storm_200614
 
5. risk rating
5. risk rating5. risk rating
5. risk rating
 
Tricumen / RWA dynamics FY11-FY14E_070115 open
Tricumen / RWA dynamics FY11-FY14E_070115 openTricumen / RWA dynamics FY11-FY14E_070115 open
Tricumen / RWA dynamics FY11-FY14E_070115 open
 
Austerity to save the banks
Austerity to save the banksAusterity to save the banks
Austerity to save the banks
 
When Fiscal consolidation meets private deleveraging
When Fiscal consolidation meets private deleveragingWhen Fiscal consolidation meets private deleveraging
When Fiscal consolidation meets private deleveraging
 
Saxo Bank Equity Outlook
Saxo Bank Equity OutlookSaxo Bank Equity Outlook
Saxo Bank Equity Outlook
 
The 2009 Interest Rate Outlook
The 2009 Interest Rate OutlookThe 2009 Interest Rate Outlook
The 2009 Interest Rate Outlook
 
Aminullah assagaf p1621 ch. 16 sd 21_financial management_28 mei 2021
Aminullah assagaf p1621 ch. 16 sd 21_financial management_28 mei 2021Aminullah assagaf p1621 ch. 16 sd 21_financial management_28 mei 2021
Aminullah assagaf p1621 ch. 16 sd 21_financial management_28 mei 2021
 
Global crisis2011
Global crisis2011Global crisis2011
Global crisis2011
 
Fiscal Risks
Fiscal RisksFiscal Risks
Fiscal Risks
 

Similaire à The Sovereign Risk

19122012 172236 f001_country risk management
19122012 172236 f001_country risk management19122012 172236 f001_country risk management
19122012 172236 f001_country risk managementAkash Prusty
 
Hyre Weekly Commentary
Hyre Weekly CommentaryHyre Weekly Commentary
Hyre Weekly Commentaryhyrejam
 
Sprung investment management commentary 3rd quarter, 2016
Sprung investment management commentary   3rd quarter, 2016Sprung investment management commentary   3rd quarter, 2016
Sprung investment management commentary 3rd quarter, 2016Robert Champion
 
Essay On Finance Case Vanguard International Growth
Essay On Finance Case Vanguard International GrowthEssay On Finance Case Vanguard International Growth
Essay On Finance Case Vanguard International GrowthSheila Guy
 
Review of the Markets - 1st Quarter 2013
Review of the Markets - 1st Quarter 2013Review of the Markets - 1st Quarter 2013
Review of the Markets - 1st Quarter 2013Barry Mendelson
 
Hyre Weekly Commentary
Hyre Weekly CommentaryHyre Weekly Commentary
Hyre Weekly Commentaryhyrejam
 
Investment forecast combined presentations
Investment forecast combined presentationsInvestment forecast combined presentations
Investment forecast combined presentationsCPBIOntario
 
Investment forecast combined presentations
Investment forecast combined presentationsInvestment forecast combined presentations
Investment forecast combined presentationsCPBIOntario
 
Vunerabilidad de los mercados emergentes Octubre 2014
Vunerabilidad de los mercados emergentes Octubre 2014Vunerabilidad de los mercados emergentes Octubre 2014
Vunerabilidad de los mercados emergentes Octubre 2014Jaime Cubillo Fleming
 
Vulnerable emerging markets
Vulnerable emerging marketsVulnerable emerging markets
Vulnerable emerging marketsIgnacio Jimenez
 
Wac Ncc041510 Global Finance,Uncharted Waters
Wac Ncc041510 Global Finance,Uncharted WatersWac Ncc041510 Global Finance,Uncharted Waters
Wac Ncc041510 Global Finance,Uncharted WatersDavid Edick Jr
 
Hyre Weekly Commentary
Hyre Weekly CommentaryHyre Weekly Commentary
Hyre Weekly Commentaryhyrejam
 
Michael O'Sullivan 22-04-09
Michael O'Sullivan 22-04-09Michael O'Sullivan 22-04-09
Michael O'Sullivan 22-04-09dpalcic
 
TheAdvisory_Sept2015_vFINAL
TheAdvisory_Sept2015_vFINALTheAdvisory_Sept2015_vFINAL
TheAdvisory_Sept2015_vFINALMalcolm Fitch
 
THIRD QUARTER 2015 RETROSPECTIVE AND PROSPECTIVE We’ve Seen This Movie Before
THIRD QUARTER 2015   RETROSPECTIVE AND PROSPECTIVE  We’ve Seen This Movie BeforeTHIRD QUARTER 2015   RETROSPECTIVE AND PROSPECTIVE  We’ve Seen This Movie Before
THIRD QUARTER 2015 RETROSPECTIVE AND PROSPECTIVE We’ve Seen This Movie BeforeRobert Champion
 
Next Financial Crisis: Made in China?
Next Financial Crisis: Made in China?Next Financial Crisis: Made in China?
Next Financial Crisis: Made in China?Richard Ramsey
 
A Days Worth Of Shocks
A Days Worth Of ShocksA Days Worth Of Shocks
A Days Worth Of Shockspopeni
 

Similaire à The Sovereign Risk (20)

19122012 172236 f001_country risk management
19122012 172236 f001_country risk management19122012 172236 f001_country risk management
19122012 172236 f001_country risk management
 
Hyre Weekly Commentary
Hyre Weekly CommentaryHyre Weekly Commentary
Hyre Weekly Commentary
 
Ow db-wealth-management-running-faster-to-stand-still
Ow db-wealth-management-running-faster-to-stand-stillOw db-wealth-management-running-faster-to-stand-still
Ow db-wealth-management-running-faster-to-stand-still
 
Sprung investment management commentary 3rd quarter, 2016
Sprung investment management commentary   3rd quarter, 2016Sprung investment management commentary   3rd quarter, 2016
Sprung investment management commentary 3rd quarter, 2016
 
Oei feb-16
Oei feb-16Oei feb-16
Oei feb-16
 
Essay On Finance Case Vanguard International Growth
Essay On Finance Case Vanguard International GrowthEssay On Finance Case Vanguard International Growth
Essay On Finance Case Vanguard International Growth
 
Review of the Markets - 1st Quarter 2013
Review of the Markets - 1st Quarter 2013Review of the Markets - 1st Quarter 2013
Review of the Markets - 1st Quarter 2013
 
Hyre Weekly Commentary
Hyre Weekly CommentaryHyre Weekly Commentary
Hyre Weekly Commentary
 
Investment forecast combined presentations
Investment forecast combined presentationsInvestment forecast combined presentations
Investment forecast combined presentations
 
Investment forecast combined presentations
Investment forecast combined presentationsInvestment forecast combined presentations
Investment forecast combined presentations
 
Vunerabilidad de los mercados emergentes Octubre 2014
Vunerabilidad de los mercados emergentes Octubre 2014Vunerabilidad de los mercados emergentes Octubre 2014
Vunerabilidad de los mercados emergentes Octubre 2014
 
Vulnerable emerging markets
Vulnerable emerging marketsVulnerable emerging markets
Vulnerable emerging markets
 
Wac Ncc041510 Global Finance,Uncharted Waters
Wac Ncc041510 Global Finance,Uncharted WatersWac Ncc041510 Global Finance,Uncharted Waters
Wac Ncc041510 Global Finance,Uncharted Waters
 
Hyre Weekly Commentary
Hyre Weekly CommentaryHyre Weekly Commentary
Hyre Weekly Commentary
 
EIU Global Forecast Report Q4/2020
EIU Global Forecast Report Q4/2020EIU Global Forecast Report Q4/2020
EIU Global Forecast Report Q4/2020
 
Michael O'Sullivan 22-04-09
Michael O'Sullivan 22-04-09Michael O'Sullivan 22-04-09
Michael O'Sullivan 22-04-09
 
TheAdvisory_Sept2015_vFINAL
TheAdvisory_Sept2015_vFINALTheAdvisory_Sept2015_vFINAL
TheAdvisory_Sept2015_vFINAL
 
THIRD QUARTER 2015 RETROSPECTIVE AND PROSPECTIVE We’ve Seen This Movie Before
THIRD QUARTER 2015   RETROSPECTIVE AND PROSPECTIVE  We’ve Seen This Movie BeforeTHIRD QUARTER 2015   RETROSPECTIVE AND PROSPECTIVE  We’ve Seen This Movie Before
THIRD QUARTER 2015 RETROSPECTIVE AND PROSPECTIVE We’ve Seen This Movie Before
 
Next Financial Crisis: Made in China?
Next Financial Crisis: Made in China?Next Financial Crisis: Made in China?
Next Financial Crisis: Made in China?
 
A Days Worth Of Shocks
A Days Worth Of ShocksA Days Worth Of Shocks
A Days Worth Of Shocks
 

The Sovereign Risk

  • 1. Sovereign Risk Analysis Nicolas Forest, Head of Interest Rate Strategy September 2010
  • 2. How can we evaluate the sovereign risk ? Contradictory points of view Rating Agency Private companies analyze sovereign credit of each country based on political and economic risks. The rating is a public indicator of the solvency of each country Credit Scoring Based on a cross-country analysis, a logistic regression could fit the current long term rating. A good expectations of different variables could help to anticipate the ratings changes Fundamental Analysis A rigorous analysis of each country independent of rating agencies is based on economic approach and fiscal simulations Market Valuation The bonds prices are defined by supply and demand and reflect an implied probability of default for each country
  • 3. Sovereign Credit Ratings Sovereign ratings history 1900 Moody’s established issued its first sovereign rating 1920 Rating agencies rates an increasing number of sovereign Yankee bond issues 1929 Poor’s published rating of Yankee bonds issued by 21 national governments 1930 Sovereign defaults spiked during the 1930s depressions. By 1939, all European sovereign ratings were in the speculative grade 1940 Most ratings were suspended during the war with the exception of the Canada or the Usa 1963 Introduction of Interest Equalization Tax in the Usa and creation of European bonds market The best rating ‘AAAAA’ for Usa and ‘B’ for China and Greece By 1935, Standard rated Chile and Peru at ‘D’ and Germany and Japan in the low speculative grade By 1939, UK remained at ‘AA’ but Germany was downgraded to ‘D’ In 1968, S&P suspended all sovereign ratings except those on Canada and Usa which remained at ‘AAA’ Rating Agency
  • 4.
  • 5. Sovereign Credit Ratings The ratings methodology Economic and growth prospects General government debt burden Monetary flexibility External liquidity Rating Agency
  • 6. Sovereign Credit Ratings A chronology of European sovereign default 1820 1824 Greece 1840 1860 1880 1900 1920 1940 1960 1980 2000 1831 Spain 1834 Portugal 1867 Spain 1868 Austria 1876 Turkey 1892 Portugal 1893 Greece 1914 Austria 1915 Bulgaria Romania 1917 Russia 1932 Austria Bulgaria Germany 1940 Turkey 1981 Poland Romania 1978 Turkey 1983 Yugoslavia 1998 Ukraine Russia 2002 Moldova 1933 Yugoslavia Romania 1931 Hungary Great Recession in US & in Europe Russia revolution and the first world war Defaults in Africa Defaults in Latin America Defaults in Latin America Rating Agency (worldwide)
  • 7. Sovereign Credit Ratings An evaluation of credit rating Sample of involuntary debt restructurings Rating Agency
  • 8. Internal Credit Rating Explanatory variables % of variables with missing values per country % of countries with missing values per variable Credit Scoring
  • 9. Internal Credit Rating Logistic Regressions Distribution of long term foreign currency rating Cumulative Distribution of long term foreign currency rating Credit Scoring 3.940 0.032 0.008 -0.018 - Public Debt 51 123.630 0.000 0.187 1.177 + Corruption Perception Index (2009 Score) 50 9.379 0.000 0.144 0.573 - External debt stocks, total (DOD, current US$)* 46 7.088 0.000 0.029 0.110 + Current account balance (% of GDP) 37 13.312 0.002 0.038 -0.120 - Inflation, consumer prices (annual %) 26 43.986 0.014 0.024 0.060 + Gross domestic savings (% of GDP) 25 4.020 0.044 0.034 0.068 + Gross capital formation (% of GDP) 24 19.042 0.000 0.123 0.461 + Health expenditure, total (% of GDP) 3 5.507 0.001 0.775 2.526 + Economic Development 1  Deviance p-value S.E. Coeff. E.S. Variable Nr.
  • 10. Internal Credit Rating Sovereign Rating of Netherlands Credit Scoring
  • 11. Internal Credit Rating Sovereign Rating of France Credit Scoring
  • 12. Internal Credit Rating Sovereign Rating of AAA countries Credit Scoring AAA AA The best AAA The questionable AAA The Expected AA
  • 13. Internal Credit Rating Sovereign Rating of Argentina Credit Scoring
  • 14. Internal Credit Rating Corruption Perception Index The CPI index as been created in 1995 and ranks today more than 150 countries in term of perceived levels of corruptions. There exits a clear relation between the corruption perception index and the long term rating Credit Scoring
  • 15. Market Valuation Does the credit rating explain the level of spread ? Market From a long term perspective, the degradation of long term ratings coincides with a global spread widening… … but the relation is clearly less relevant on short term ! + - AAA AAA
  • 16. Market Valuation Market Does the credit rating explain the level of spread ? + = - - +
  • 17. Market Valuation Implied probability of a default Market Based on recovery value close to 50%, we can extract from the market the cumulative implied probability of default
  • 18. Fundamental Analysis Liquidity and curve Market
  • 19.
  • 20. Fundamental Analysis Determination of a debt limit Analysis Behavior of the primary balance as function of debt At low levels, there is little response of the primary balance to rising debt As debt increases, the balance responds more vigorously When the level is too high, impact could decrease Interest rate schedule The interest rate schedule = (interest rate – growth) x debt ratio If we assume that growth is independent of the level of debt, the function is linear 1 2 3
  • 21. Fundamental Analysis Fiscal Space valuation by IMF Analysis
  • 22.
  • 23. Conclusion Investment opportunities Rating Agency Probability of default implied by ratings Credit Scoring Probability of default implied by internal ratings Fundamental Analysis What is the probability to expect a default ? Market Valuation Probability implied by the market Investment Strategies
  • 24.
  • 26. Annex Internal Model - Outputs
  • 27. Addresses Luxembourg Dexia Asset Management Luxembourg SA 136, route d’Arlon 1150 Luxembourg Tel.: + 352 2797-1 Belgium Dexia Asset Management Belgium Place Rogier 11 B-1210 Bruxelles Tel.: + 32 02 222 11 11 France Dexia Asset Management SA 40, rue Washington 75408 Paris Cedex 08 Tel.: + 33 1 53 93 40 00 Switzerland Dexia Asset Management Luxembourg SA succursale de Genève 2, rue de Jargonnant 1207 Genève Tel.: + 41 22 707 90 00 The Netherlands Dexia Asset Management Nederlands bijkantoor Lichtenauerlaan 102-120 3062 ME Rotterdam Tel.: + 31 10 204 56 53 Germany Dexia Asset Management Luxembourg SA Zweigniederlassung Deutschland An der Welle 4 60422 Frankfurt Tel.: + 49 69 7593 8823 Australia Ausbil Dexia Ltd Veritas House – Level 23 207 Kent Street Sydney NSW 2000 Tel.: + 61 2 925 90 200 Italy Dexia Asset Management Luxembourg SA Succursale Italiana Corso Italia 1 20122 Milano Tel.: + 39 02 31 82 83 62 Spain Dexia Asset Management Luxembourg SA Sucursal en España Calle Ortega y Gasset, 26 28006 Madrid Tel.: + 34 91 360 94 75 Bahrain Dexia Asset Management Luxembourg S.A., Middle East Representative Office Bahrain Financial Harbour, Financial Center, West Harbour Tower, Level 23 King Faisal Highway PO Box 75766 Manama Tel.: + 973 1750 99 00 Canada Dexia Asset Management Luxembourg SA Canadian Representative Office 155, Wellington Street West 6th floor Toronto, Ontario M5V 3L3 Tel.: + 1 416 974 9055
  • 28.