When a government defaults on its debts, its access to international credit markets remains impaired for several years, says Moody’s Investors Service in a new report.
The report which examines the historical experience with sovereign defaults finds that, on average, sovereign governments remained out of international capital markets for 5.6 years after default, and 4.4 years after the final default is resolved. Additionally, 45% of defaulters did not regain market access during the 1997-2013 study period.
The rating agency says that it analyzed 36 distressed exchanges of sovereign bonds since 1997, by 20 sovereign issuers. “We find that the length of market exclusion was highly correlated with the size of the loss imposed on investors during the debt restructuring,” says Elena Duggar, Moody’s group credit officer for sovereign risk and author of the report.
“However, market access does not seem to have been correlated with the size of the debt restructuring,” adds Duggar. “Also, the length of market exclusion was generally not driven by inability to resolve the default — default resolution was relatively quick, on average taking about one year.”
Moody’s says that the time to regain market access varied greatly among countries and depended on country-specific developments, including how quickly the economy recovered, fiscal and debt outcomes improved, external vulnerabilities subsided, and political stability was restored.
Also, Moody’s says that sovereign creditworthiness remained stressed years after default. “The case study analysis does not suggest that sharp improvement in credit ratings preceded market re-access, nor that market re-access led to sharp improvement in credit ratings,” says Duggar. “Rather, both the ability of countries to re-access the market and credit ratings improved as credit fundamentals, such as economic prospects, fiscal and debt metrics, external balances and domestic policies, improved.”