Country Risk Third Quarter 2014

Global financial appetite remained in the Financial Markets during a second consecutive quarter supported by the stand by in US monetary policy and the soft stance by the ECB. Financial tensions have continued declining, specially in emerging markets, and sovereign risk premia are stable at very low historical levels in both developed and emerging markets (EM).

Financial Markets & Global Risk Aversion

• Global financial appetite remained in the Financial Markets during a second consecutive quarter supported by the stand by in US monetary policy and the soft stance by the ECB. Financial tensions have continued declining, specially in emerging markets, and sovereign risk premia are stable at very low historical levels in both developed and emerging markets (EM).

• The Ukrainian-Russian conflict, the advance of the IS in Iraq & Syria and the recent Argentinian sovereign debt problems have not triggered regional or global spillovers so far. In fact, Global Risk Aversion (VIX) has remained stable during last quarter. However, Geopolitical risks coming from the Middle East are still on the rise in Iraq and neighbor countries. 

• Net capital flows to EM moderated during the last quarter, especially in EM Europe.

Sovereign Markets & Ratings Update

• Sovereign risk premia in developed markets have remained at similar levels of our previous Quarterly Report, with some minor volatility in some peripheral countries (Greece and Portugal). There were only some exceptions of deteriorating spreads due to country specific events (Russia and Argentina).

• The positive credit rating cycle in the EU periphery has had one of its more positive quarters with the upgrades of Portugal (second quarter in a row) and Greece by Moody’s, and of Ireland by both S&P and Fitch.

• The rating cycles across emerging regions continues to be mixed: Argentina suffered a strong downgrade by all the rating agencies, meanwhile Peru and Colombia were upgraded by Moody’s (two and one notches). Bulgaria and South Africa were downgraded by S&P and Croatia by Fitch.

Our own Country Risk Assesment

• Developed Markets continued to be supported by Central Banks but with an increasing divergence between the US and European cycles and monetary policy. The sovereign rating cycle has continued to improve in the EU periphery despite low growth and disinflation, supported by monetary policy.

• Emerging Markets evolution will mainly depend on the US monetary policy and capital flows will continue to dance around news coming from the US economy and the Federal Reserve. The ratings’ divergence have started to accelerate with Emerging Europe being the riskiest region

• Geopolitical risk has clearly increased with the Ukraine-Russia conflict and the advance of ISIS in Iraq and Syria. So far the conflict pressure is localized but the risk of spill overs is important. Social unrest pressures have diminished in Europe while increasing in Eastern Europe, North Africa and the Middle East.