Sovereign defaults continue to decline in 1998: S&P

JAKARTA (JP): Despite financial stress in Asia and its fallout on emerging markets, debt defaults by sovereign governments would continue to decline this year, according to the international rating agency Standard & Poor's.

The agency said in the October edition of its Asia Focus that sovereign defaults by number of issuers fell to 37 in 1997, the lowest level recorded since 1982, from 46 in 1996.

The issuer default rate, in relation to the universe of all sovereign governments, stood at about 18 percent in 1997, well below its peak of 31 percent in 1990.

The value of sovereign debt in default also declined in 1997 to US$77 billion, just a quarter of the amount in default in 1990.

No new defaults occurred last year. This contributed to the decline.

"Developments thus far in 1998, moreover, suggest that the number of sovereign issuers in default, as well as the total amount of defaulted debt, will fall again this year and possibly in 1999, as well," the agency said.

It predicted that the total value of sovereign defaults could fall by as much as $42 billion to about $35 billion this year. Next year, defaults could drop by another $10 billion.

Several bank debt restructuring deals which were already completed or in the pipeline should more than offset the impact on the number of any new sovereign defaults that occurred.

The agency, however, warned that defaults on foreign currency bonds, in contrast with defaults on bank loans, would remain exceptional although from a longer-term perspective they were gradually increasing.

"Bonds issued by Pakistan and Indonesia -- rated 'CCC' and 'CCC+', respectively, with a combined face value of about $1.2 billion -- face the greatest risk of short-term default," it said.

It noted that the stock of rated foreign currency debt of sovereign governments in the "B" and "CCC" categories currently stood at some $44 billion.

However, the agency said the majority of sovereign debt rated in the "B" category would continue to perform this and next year.

In the local currency debt, the agency predicted that defaults would be tailing off again after rising in 1995 and 1996. Local currency debt defaults would continue to be relatively rare.

Looking into the next decade, the agency said the sovereign default rate would likely pick up again because of the downward rating pressure currently affecting a number of emerging market governments.

"Overall, however, the number of sovereigns in default, along with the total value of the affected debt, should be somewhat lower than during the last major round of default in the 1980s," Standard & Poor's said.

It said bank debt almost certainly would feature less prominently and foreign currency bonds much more so. As a result, default rates on foreign currency bonds should eventually converge with the default rates on bank loans. (rid)