Global sovereign default risk to increase as credit rating downgrades to outnumber upgrades in 2017 says S&P

Jasper Jolly
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Political risk – such as in Venezuela – can lead to downgrades in credit ratings (Source: Getty)

The risk of governments around the world defaulting on their debt is set to increase over the course of 2017 – although Europe’s sovereigns are expected to improve for the first time since the financial crisis, according to an influential ratings agency.

Negative outlooks outnumber positive outlooks on sovereign credit ratings, which aim to measure the risk of countries not being able to pay their debts, according to S&P Global Ratings.

The balance of negative outlooks for the coming year has moved from 17 to 23 – a 35 per cent increase – over the course of the last year, driven by an increased default risk in Latin America and the Middle East.

The global move towards protectionist trade policy – heralded by Donald Trump in the US – may also increase these risks incoming the coming months, although the moves began well before the election.

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Moritz Kraemer, chief rating officer at S&P, told City A.M.: "The fact that there may be a risk of more protectionism would exacerbate those risks."

Almost half of the 130 rated countries are not investment grade, the lowest level ever, indicating that the universe of safe investments has shrunk.

Note the downgrade of the US in August 2011 and the UK in 2016

The number of “AAA” top-rated sovereigns has also fallen since the financial crisis. The UK had the coveted top rating until June 2016, when it was downgraded following the EU referendum.

Firms will likely be putting in place plans for a so-called "hard" Brexit in the coming months, said Kraemer. this could involve a fall in investment, he says, with subsequent falls in employment likely.

"We would expect that many firms will have to start preparing for that now," said Kraemer.

At the start of 2017 the UK has a negative outlook with the "significant risk" attached to the process of leaving the EU casting a shadow over economic prospects.

S&P downgraded country ratings – meaning they carried a higher risk of default – three times more often than it upgraded them in 2016.

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Downgrades from ratings agencies affect which government debt some investors can hold. For instance, a downgrade from an investment-grade BBB- rating to a lower junk rating means some investors cannot buy government debt, reducing the demand and therefore the amount of money governments can borrow.

Sovereign securities – bonds issued by governments wishing to borrow money from global markets – are the most important debt asset class in the world. Pension funds and other countries hold sovereign debt as a low-risk, guaranteed source of income.

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