S&P expects more sovereign defaults

S&P expects more sovereign defaults

LONDON (Reuters): Sovereign credit rating cuts so far this
year outnumber rating rises and countries defaulting on debts are
expected to increase in the coming decade, a study by rating
agency Standard & Poor's said yesterday.

There were no new sovereign defaults in 1997, but bonds issued
by Pakistan and Indonesia face the greatest risk of default in
the near term, the sovereign default study said.

"The number of sovereign issuers in default...will fall again
this year and possibly in 1999. Looking into the next decade, S&P
expects the default rate in the sovereign sector to pick up," S&P
said.

"After a number of years in which rating upgrades exceeded
downgrades, the tide turned in 1997 and now is running sharply in
the other direction. Thus far in 1998, downgrades are outpacing
upgrades by eight to one."

The study, which analyses rated and unrated local and foreign
currency bank loans and bonds issued by 201 governments and
territories, said the value of debt in default in 1997 fell to
around $77 billion from $84 billion in 1996.

"Financial stress in Asia, and its fallout on emerging markets
more generally, so far is not affecting the declining trend in
defaults by sovereign governments," S&P said.

"Fiscal discipline, debt management, and the contingent
liabilities arising from weak banking systems represent
significant policy challenges for many governments," it said,
adding the associated credit risks can mushroom quickly.

"Given these factors, it would be surprising if a new
sovereign bond default cycle did not emerge over the next
decade."

The total amount of debt in default could fall to $35 billion
this year and fall a further $10 billion in 1999. Much of this is
due to debt rescheduling, with Peru and Bosnia, for example,
completing bank debt default restructurings.

S&P said around $44 billion of foreign currency sovereign debt
falls in the B and CCC rating categories, well below investment
grade. Of this amount, bonds issued by Pakistan and Indonesia
with a combined value of around $1.2 billion "face the greatest
risk of near-term default".

"But S&P expects that the majority of sovereign debt rated in
the B category will continue to perform this year and next."

The last sovereign debt crisis happened in the 1980s, when
many governments, particularly in Latin America, were not able to
pay loans taken out from international banks.

S&P said the number of foreign currency bond issuers, while
growing, is smaller than the number of governments which had
access to cross-border bank finance in the run-up to the 1980s
debt crisis. Also, demand for speculative grade debt was likely
to fall once sovereign defaults start to occur.

"These factors, together with a still benign global interest
rate environment, the general improvement in sovereign credit
quality since the 1980s and, in some cases, timely IMF financial
support, should make the next round of defaults somewhat more
muted than the last one," S&P said.