Sovereign Risk Analysis

Course Description The current sovereign debt crisis in Europe has focused attention on the vital importance a proper understanding of country risk is for investors and financial market participants at all levels. Sovereign risk has been widely ignored or assumed to be negligible, and predictions of credit risk dynamics of governments - as well as the risk of institutions and borrowers in these countries – have proved misleading. As this phase of the global financial crisis deepens it is more and more essential to actively monitor, assess, mitigate – and price - sovereign risk for developed and advanced countries, just as it has long been for emerging and transitional economies. Many formerly ‘emerging market’ countries are seeing their risk profiles continuing to improve to a point above those of ‘developed’ countries. This workshop provides a comprehensive foundation for assessing country and sovereign risk issues, including the use of quantitative factors and data (often as misleading as they are useful, without careful analysis), other internal and external risk determinants, especially an overview of the country’s financial institutions, and factoring in potential support (and restrictions) from international agencies and how this is changing. Delegates to this course will gain an understanding of the pricing of securities in capital markets, and how other market participants assess and price risk, especially the methodologies of the leading international rating agencies, their strengths and weaknesses, and how these methodologies are evolving in response to the current crisis. The seminar examines the complex and costly process of country defaults and moratoria, and their meaning and implications for debt investors and creditors of other institutions in these countries. Also reviewed will be the reasons why some sovereign credits are continuing to improve in quality despite financial crisis in much of the global financial markets. The course will combine a wide-ranging discussion of the key analytical issues with extensive practical examples and case studies. Lessons will be drawn from the current sovereign crisis, as well as from those of the past that hold important lessons for the future. Participants will use these tools to themselves construct analyses of a variety of key countries from around the world, and through credit review and critique sessions in the group will finalise formal credit judgements and conclusions. Attend this intensive and highly practical 4-day workshop and learn the best practice techniques and tools to: Understand sovereign debt issuance in today’s capital markets Interpret macroeconomic and other quantitative data Integrate qualitative risk factors into the risk assessment Measure the likely impact of banking system support on the sovereign credit Assess the importance and impact of supranational agencies Appreciate how the ratings agencies, and other practitioners in the markets, assess and price risk Anticipate defaults, and minimise loss in a stress situation Position for recovery situations and predict improving sovereign credit quality Who should attend? International and investment bankers Country and bank risk managers Corporate treasurers Risk analysts Investors and fund managers Originators Economists Export credit managers Banking strategists Fixed income and equity traders Financial institution bankers and relationship managers Credit rating personnel Banking system regulators and supervisory staff
Day 1 Sovereign Debt Issuance Basics Background Capital markets and buyers of sovereign debt Currency issues for emerging market and developed countries Typical terms and conditions of debt issues Pricing of securities and the divergence of spreads Case study: spread divergence and volatility in the Eurozone since 2007 Foundation of analytical techniques Political and social structures and constraints Social and welfare systems in the modern state Levels of development in transitional economies Taxation principles and their limits Government legitimacy and authority Economic modelling: data sources Current account balances: the perils of imbalances Debt levels: government, and private sector metrics Issues of solvency and liquidity countries Debt maturity schedules The key financial ratios for country risk analysis Contingent liabilities of the sovereign The financial system and its importance Case study: integrating quantitative and qualitative factors - Dubai Monetary and fiscal policy and its implications Functions of the financial markets and banking system The activities of the central bank Interventions by the ECB and other supranational institutions Regional issues: debt issuance and the financial condition of sub sovereign and local authorities The impact of, and fear of, inflation Foreign currency issuance and its specific risks for developing countries Currency regimes Case study: Brazil and the government’s access to developing local financial markets since the Plano Real. The impact of fixed and floating exchange rates on risk Day 2 International credit rating agencies What credit ratings are – their evolving definition Case study: why should the US not be “AAA”? How ratings agencies assign ratings; changing methodologies The special sensitivity of sovereign ratings How accurate are ratings? Case study: how to use a “Default Study” How the markets use credit ratings; how financial institutions use ratings Can ratings predict default? The ratings business: profitable but mismanaged The future of the ratings agencies and their business – more competition? Sovereign risk and the markets How markets signal and respond to changes in sovereign risk Risk instruments and hedging – the rise and fall of the CDS Case study: are CDS more accurate than credit ratings? Sovereign risk – and debt and equity instruments: the connection Sovereign risk under stress Government debt levels – is there a ceiling? Banking sector shocks, and policy responses Government stimulus measures and the impact on risk Evolving patterns of international and multilateral support in stress Policy responses from the ECB, the IMF; recent bilateral arrangements Case study: global multilateral support during the Asian financial crisis Improving sovereign credits Factors behind positive credit trends among major sovereigns Changing patterns of trade and investment – how the ‘China’ factor benefits some countries How far are positive credit dynamics consistent with a ‘global’ crisis? Case studies: did Asia ‘decouple’? Day 3 Analysis of the financial sector and its potential impact on sovereign risk Institutional and systemic bank failure – dimensioning the contingent liability Why and how banks fail Assessing the quality of bank regulation – is supra-national regulation the answer? Asset quality deterioration experiences Case study: Mexico, Ireland, and Spain: lessons from history and today Credit and non-credit risks in banks Capital – how much is enough? Liquidity issues – is deposit insurance the answer? Good bank/bad bank – asset quality crisis resolution for our time Case study: the differing approaches of three Scandinavian countries Financial institutions in the context of a country’s economy Institutional ownership: nationalisation, privatisation – the impact on the sovereign The globalisation of banking and its complicating impact on bank resolution Governmental support mechanisms and their evolution; the “Too big to fail” doctrine How banks and banking systems recover, and the implications for the country risk Case study: Kazakhstan, Iceland; the United States Portfolio management and sovereign risk Risk diversification issues in country risk Understanding contagion: debt linkages between countries Case study: recent changes in the financial and risk linkages in the Eurozone International agency measures; standby facilities Day 4 Sovereign debt crises and their resolution Default - special issues for countries Default structures – moratoria, rescheduling, debt exchanges Historic patterns of default by developed countries Case study: Greece and Argentina contrasted The evolving treatment of sovereign creditors International support – forcing losses on creditors: “bailing in” Case study: Ecuador and the IMF Remedies for creditors; pursuing legal claims Default recovery rates – some recent data Using financial instruments and insurance to mitigate loss Returning to the market: how sovereigns restore trust Regional and local sub-sovereign borrowers Historic patterns of issuance Analysis of sub-sovereign borrowers Central-regional government links and financial flows Recent stressed sub-sovereigns and implications for the sovereign Do sub-sovereigns default? Case studies: local authorities in Italy, Valencia; US municipalities, China Country ceilings: sovereign risk and transfer risk – the evolution of a concept The relationship between the government’s credit quality and that of other major borrowers in the country Historic evolution of the ‘country ceiling’ Structuring transactions that attempt to avoid sovereign risk Recent developments in transfer risk and sovereign moratoria – increasing pragmatism of sovereigns Case studies: LatAm oil deals; Indonesia; Pakistan; Uruguay; Russia Topics in country risk Reserve currencies: the future of the US dollar, and the rise (and fall?) of the Euro, as reserve currencies Course summary and close