Global Sovereign Borrowing To Increase By 3% To $7.1 Trillion in 2014
We forecast that global sovereign borrowing will increase by 3% to $7.1 trillion in 2014. Our global report summarizes a series of simultaneously released regional sovereign borrowing and debt reports, which are available on this page.
The economic crisis in the periphery of the eurozone weakened confidence in sovereigns' and banks' creditworthiness. Supported by liquidity facilities from the European Central Bank (ECB), banks in Spain, Greece, Portugal, and Italy have increased their exposure to sovereign securities of their home nations. This has furthered the link and negative feedback loop between banks' and sovereigns' creditworthiness. But because credit quality of the sovereigns has eroded, these nations could borrow only at elevated costs. Concerns spread about whether the nations themselves could stay solvent and how badly hurt banks holding their debt would be if they could not. It was to avoid this vicious circle that European policymakers extended the mandate of the European Stability Mechanism (ESM) in mid-2012, allowing it, in principle, to fund troubled banks directly in the future under strict conditions.
Gradually improving economies and investors' continued appetite for corporate credit in the bond markets on attractive terms is helping to stabilize credit quality for European nonfinancial corporate issuers somewhat. Nonetheless, there is further work to be done in dealing with vulnerable, highly leveraged pre-2008 vintage credits that will maintain pressure on defaults in CLO portfolios. Taking into account the growing proportion of new speculative-grade issuers in our portfolio (that is, those we rate 'BB+' and below), which generally have better credit quality than was previously the case, we anticipate that the overall default rate (including for private companies) could decline to 5.2% by the end of March 2015 from 5.9% at the end of 2013. However, we would likely raise our default expectations if we see signs of overheating in the high-yield market.
About 601,000 workers said they couldn't make it to work because of the weather in February, which was almost twice the historical average for the month. Heading into today's February employment announcement, expectations for job gains were not high because of atypically severe winter weather during the survey reference week of February (and the entire month, in general). Although many workers got stuck in the snow, the Bureau of Labor Statistics reported that 175,000 jobs were created in February. That's much better than the consensus expectation of 140,000 job gains and likely enough for the Federal Reserve to stay on its tapering course of a $10 billion reduction in asset purchases at its March meeting.
In third-quarter 2013, the quarter for which the latest data is available, the gap in delinquencies between U.S. housing finance agencies' (HFA) single-family whole-loan mortgages and comparable prime state portfolios we rate widened significantly. HFA loan delinquency rose to 7.48% of the total balance (compared with 7.06% a quarter earlier), and state loan delinquency declined slightly to 5.23% from 5.26% in second-quarter 2013. The 1.8 percentage point jump to a 2.25 percentage-point gap created the largest discrepancy we have recorded. However, the higher HFA delinquency rate is almost entirely due to greater loan delinquencies from the New Jersey Housing and Mortgage Finance Agency and the Pennsylvania Housing Finance Agency, which now have the two highest delinquency rates in our survey.
The Indian regulator's revised tariff norms for 2014-2019 could weaken the margins of state-owned utilities. But the extent of the impact will differ among the three state-owned power companies that we rate in India: NTPC Ltd., NHPC Ltd., and Power Grid Corp. of India Ltd. While we think that the revised regulatory tariff structure is likely to weaken the operating performances of NTPC, NHPC, and Power Grid, it is unlikely to affect the ratings on these companies. This is because the ratings on these companies incorporate some level of government support, in accordance with our methodology to assess government-related entities.
KBC Group Upgraded On Belgium's Stabilizing Economic Risks And Our Expectation For Capital Strengthening
The rating actions follow our revision of the outlook on Belgium to stable. We also factor in our view that the economic risk trend in Belgium is stable, under our Banking Industry Country Risk Assessment (BICRA) methodology. We consider that KBC now operates in a more supportive economic environment and consequently it should have a greater ability to increase its net income and strengthen its capital over the next three years. We also take into account the group's recent clarification of its dividend policy and its proposed tier 1 hybrid capital issue. We estimate that the Belgian economy will grow in real terms by an average of 1.2% annually over 2014-2017.