26-year low sovereign defaults likely to continue in 2007: S&P
19 Sep 2006
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Mumbai: A report published yesterday by Standard & Poor's Ratings Services during the annual meetings of the International Monetary Fund and the World Bank highlights that the overall credit standing of rated and un rated sovereign governments continues to improve.
The report, titled Sovereign Defaults At 26-Year Low, To Show Little Change in 2007, says that the number of defaults by sovereign governments on bond and bank loans has fallen so far in 2006, and in addition is likely to remain at a low level in 2007. Standard & Poor's estimates that the number of rated and un-rated sovereigns in default now stands at 16, down from 24 at the end of 2005. The amount of defaulted debt has also dropped substantially during the period to $32 billion from $135 billion.
"The number of defaults by sovereign governments is at its lowest level since 1980, while the value of defaulted debt is the lowest it has been since 1982," said David Beers, global head of Standard & Poor's Sovereign and international public finance ratings group. Beers, who is the author of the report on sovereign defaults, said that similar outturns were expected in 2007.
The factors underpinning this positive prediction include a relatively benign economic environment, in which global output is set to grow by 4.9 per cent in 2006 and 4.5 per cent in 2007, despite high oil prices, geopolitical uncertainties in the Middle East, and tighter monetary conditions in the US, Europe, and Japan. Further supporting the strong credit standing among sovereigns is the completion of debt workouts in the pipeline, which should offset the impact of any new defaults that occur, and a sustained improvement in the average credit quality of rated sovereigns.
Beers noted that Standard & Poor's expects the default rate in the sovereign sector to rise again later this decade. "We base this conclusion on the speculative-grade credit quality of many newly-rated issuers, together with the low credit standing of the majority of un-rated governments."
The report, titled Sovereign Defaults At 26-Year Low, To Show Little Change in 2007, says that the number of defaults by sovereign governments on bond and bank loans has fallen so far in 2006, and in addition is likely to remain at a low level in 2007. Standard & Poor's estimates that the number of rated and un-rated sovereigns in default now stands at 16, down from 24 at the end of 2005. The amount of defaulted debt has also dropped substantially during the period to $32 billion from $135 billion.
"The number of defaults by sovereign governments is at its lowest level since 1980, while the value of defaulted debt is the lowest it has been since 1982," said David Beers, global head of Standard & Poor's Sovereign and international public finance ratings group. Beers, who is the author of the report on sovereign defaults, said that similar outturns were expected in 2007.
The factors underpinning this positive prediction include a relatively benign economic environment, in which global output is set to grow by 4.9 per cent in 2006 and 4.5 per cent in 2007, despite high oil prices, geopolitical uncertainties in the Middle East, and tighter monetary conditions in the US, Europe, and Japan. Further supporting the strong credit standing among sovereigns is the completion of debt workouts in the pipeline, which should offset the impact of any new defaults that occur, and a sustained improvement in the average credit quality of rated sovereigns.
Beers noted that Standard & Poor's expects the default rate in the sovereign sector to rise again later this decade. "We base this conclusion on the speculative-grade credit quality of many newly-rated issuers, together with the low credit standing of the majority of un-rated governments."
Nevertheless, for some years to come, the firm believes that the default rate in the sovereign sector will remain well below the levels seen in the 1980s and early 1990s. "The current benign economic environment, and greater investor certainty about how defaults are resolved, should contribute to less volatile financial conditions in emerging markets than those seen in the 1990s--even if average bond yield spreads rise from today's historically low levels," Beers concluded.
