International bond markets wary after Asian downgrades
International bond markets wary after Asian downgrades
NEW YORK (Reuters): Sweeping downgrades of the sovereign debt of South Korea, Indonesia and Thailand thrust international bond markets into confusion Monday, said analysts who pointed to shaken investor confidence in IMF aid packages and the debt rating system itself.
Moody's on Monday downgraded the foreign currency debt ratings for South Korea, Indonesia and Thailand to junk status. Moody's also lowered Malaysia's rating from A1 to A2, which kept its sovereign debt at investment grade.
Later, Standard & Poor's announced its own, more severe downgrade for South Korea, and indicated more downgrades were possible. Such rapid, sweeping downgrades raised questions about the judgment of rating agencies, an analyst with a U.S. investment bank said.
"It's unprecedented that a country drops from high grade to junk in a matter of four to six weeks," the analyst said, referring to the swift decline of Korea's ratings.
While the ratings agencies were hindered by lack of reliable government economic data, she said, they should still have demanded the information they needed.
"They saw healthy exports, massive capital inflows, and assumed everything was okay," she said. "They were lulled into a false sense of security."
Another blindspot was the rating agencies' inability to monitor problems in the private sector -- especially fragile banks, over-leveraged corporations, and industrial overcapacity -- and relate them to the sovereign risk, she said.
The downgrades came in spite of aid packages spearheaded by the International Monetary Fund. IMF aid generally stabilizes investor confidence in debtor nations, but traders and fund managers noted that these recipient nations appeared far worse off now than they did before they sought the aid.
Fund managers said the $100 billion-plus IMF-led rescue package did not lead the market to believe that the three countries would return soon to fiscal health.
"The Asian countries are facing a long hard road to recovery," said a fund manager who was worried about slow growth under the IMF austerity plan and a spiraling debt burden.
Governments of those nations will now face steeper funding costs when they tap the bond market. Many funds are prohibited from investing in junk bonds.
"We definitely see a new class of investors," said one fund manager. "Non-investment grade papers are a different asset class."
As more high yield investors replace the staid high grade crowd, the sovereign bonds of Korea, Indonesia and Thailand are likely to become more volatile, analysts said.
Korea's $9 billion 1998 funding effort will be regarded as a benchmark after the watershed downgrades, analysts said. Since Korea Development Bank delayed its $2 billion debt offering, the market has been trying to put a finger on the risk premium, experts said.
"It depends on the frequency, the maturity and the structure of the offering," said Feroz Talyarkhan, managing director of fixed income research at Bear, Stearns and Co.
The marketplace had preceded the rating agency in pricing the existing Korean debt to junk status and if KDB were to launch a three-year bond, or a 10-year bond with three-year put option, the spread would be over 400 basis points, he said.