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.