Defaults by sovereign governments declined in the first three quarters of 2003 compared with 2002 and will probably fall further in 2004, Standard & Poor’s Ratings Services has announced in its updated sovereign default survey, which examines both rated and unrated national governments.
Standard & Poor’s has identified three new governments that have defaulted this year, compared with five in 2002. At the same time, five sovereigns have emerged from default and resumed normal debt service. Overall, Standard & Poor’s estimates that the number of sovereigns in default on bonds and bank loans stands at 26, down from 28 at the end of last year. The issuer default rate, at 12.9%, has dropped slightly, and remains well below its peak of nearly 31% in 1990. The value of sovereign bonds and bank loans in default has also fallen, to about US$126bn from US$134bn in 2002, but, due to Argentina’s ongoing default, remains close to its highest level since 1994.
“We expect the number of sovereign issuers in default, and the value of defaulted debt, to fall further in 2004,” says David Beers, managing director of Standard & Poor’s sovereign and international public finance ratings group and principal
author of the report. Three factors underpin this prediction:
Completions of debt workouts in the pipeline are likely to outweigh the impact on the figures of new sovereign defaults that occur. Uruguay concluded a distressed debt exchange in May, Cameroon closed its deal with London Club bank creditors last month, and a number of other sub-Saharan governments, along with Serbia and Montenegro, are also likely to resume normal debt service later this year or in 2004.
The international economic environment is improving. A more robust pace of global output growth – about 4% annually in the second half of 2003 – looks set to continue next year, supporting a moderate upswing in exports, domestic business activity, and cross-border capital inflows for many emerging market countries. The credit fundamentals of a number of lowly rated and unrated sovereigns are likely to be underpinned as a result.
These trends are also likely to outweigh continued uncertainties over when Argentina’s default – the world’s largest at about US$86bn – will be cured, with the debt workout process still unlikely to be completed by next year.
“Looking at the current decade, we expect sovereign default rates to gradually rise again,” says Beers. “The number of speculative-grade ratings assigned since 1991, together with the below-average credit quality of most unrated sovereigns, points clearly in this direction.”
“Proposals by the IMF to create a formalised framework to manage sovereign defaults are unlikely to affect the frequency of defaults as much as many market participants fear, or their duration as much as official creditors hope,” he adds. “Financial distress is a fundamental precondition for rescheduling both official and commercial debt and, when default occurs, it is the capacity of governments to negotiate with creditors, more than the framework in which negotiations occur, that remains key to the time that it takes to resolve defaults.”