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img_publication Observatorio

Country Risk Quarterly Report. First Quarter 2018

Por

Following the recent turmoil in equity markets during February, we have observed a decoupling of different Global Risk Aversion (GRA) indicators. Markets seem to be giving much less value to the risk accounted for sovereign ratings. The tightening of sovereign spreads (CDS) is outstanding.


Summary:

  • Colombia and Brazil were downgraded by S&P. Greece was improved by S&P and Fitch, which also improved Spain, Croatia and Indonesia.
  • Following the recent turmoil in equity markets during February, we have observed a decoupling of different Global Risk Aversion (GRA) indicators. While VIX and FTI have surged, both corporate and sovereign spreads continued declining.
  • Markets seem to be giving much less value to the risk accounted for sovereign ratings. The tightening of sovereign spreads (CDS) is outstanding. The difference between the spreads of countries with very different ratings is vanishing. For instance, nowadays about 80% of the countries’ CDS we follow are now quoting below 100 bps despite ranging from ratings two notches below investment grade up to AAA.
  • Consequently, the upgrade pressures defined by the gap between CDS-implicit and Agencies ratings continue growing across the board, with particular intensity in Peripheral Europe, EM Europe and EM Asia
  • The years-long private deleveraging process in Developed Markets (DMs) and Emerging Europe has now clearly lower their vulnerability indicators. On the other hand, high public debt and external debt levels continue to be a concern in DMs. Private leverage levels seem now less of a concern in Emerging Markets (EMs).
  • On the other hand, the high growth in stock markets observed in previous months has increased several countries vulnerability.
  • Deleveraging continues in both DMs and EMs, with few exceptions in some DMs. The credit slowdown in China continues. However, housing prices continue growing strongly in several countries including many which are clearly deleveraging.
  • The warning signals from the banking system in EU Periphery are finally fading away. Exchange rates seem to be going through a period of low tensions, especially when estimated at a regional level.
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