There have been only a handful of sovereign defaults in the past several years, reflecting buoyant global economic conditions, according to Moody’s Investors Service.

The rating agency reports that, of 103 rated sovereigns, Belize was the only one to default in 2006 and is only the third country to have defaulted in the past four years. The other two are the Dominican Republic (2005) and Uruguay (2003).

“The low default volume is consistent with strong global economic conditions and ample liquidity,” explains Andrea Zazzarelli, Moody’s associate analyst director of default research and author of the report. “Reflecting this benign default environment, sovereign bond spreads continued to tighten in 2006. Last year, 19 sovereign issuers were upgraded against only two downgrades.”

Out of the 19 upgrades, Moody’s identifies three main groups: oil exporting countries; EU membership seekers and new joiners; and a trio of strong Latin American performers.

The report also notes that sovereign default rates have been on average lower than those for their corporate counterparts. The differences in default rates, however, are not likely significant because default risk is highly correlated across emerging market sovereigns and the overall size of the sovereign sample is small, it says.

Moody’s also finds that rating changes on average have been less frequent for sovereign issuers than for corporate issuers. This greater average stability of sovereign ratings derives from an overwhelmingly lower historical probability of being downgraded within a 12-month period relative to corporate issuers. In terms of accuracy, the Moody’s report notes that sovereign ratings have historically proven to be more accurate than corporate ratings as predictors of relative default risk.

Finally, Moody’s notes that the recovery rate on Belize’s defaulted bonds was 76%, substantially higher than the historical average recovery rate on sovereign bonds, which is 55% on an issuer-weighted basis and 29% on a volume-weighted basis.

“Issuer-weighted recovery rates for defaulted sovereign bonds have historically been higher than those for their corporate counterparts. Since sovereign default rates have also been lower, sovereign bonds have generally experienced lower credit loss rates than similarly rated corporate bonds,” says Zazzarelli. He also points out that the value-weighted recovery rate estimate is significantly lower than the issuer-weighted recovery rate due to the large Argentinean and Russian defaults, which garnered low recovery rates.