It looked at default and recovery rates for sovereign bond issuers between 1983 and 2005. The ratings agency also found that the average debt recovery rate on defaulted sovereign bonds has been higher.
"Credit migration rates of sovereign bond issuers have been very similar to those of corporate issuers, but default rates for sovereign issuers have been lower than those for similarly rated corporates," says Moody's Vice President Praveen Varma. "This is true for both investment-grade and speculative-grade issuers, and over both five-year and 10-year horizons."
Moody's notes that for Ba- and single-B rated issuers, sovereign default rates have been roughly half those of corporates. The agency also says that during the 22-year period studied, no sovereign issuer rated single-A or higher has defaulted on its bonds.
"This finding is not surprising, given the small sample size and the very low expected default rates of investment-grade issuers," Moody's Varma says.
Moody's rates over 100 sovereigns, of which 92 currently have rated bonds outstanding. Like corporates, roughly two-thirds of all sovereigns are rated investment grade. Unlike corporates, a large share of sovereign debt carries Moody's highest rating, Aaa.
"The growth in sovereign bond issuance coincided with the world economy becoming more integrated and investors' desire to diversify across regions and currencies," says Varma.
Despite several currency crises and other internal and external shocks, only 11 rated sovereign bond issuers have defaulted since 1983, according to Moody's.
Credit loss rates on defaulted sovereign bonds have also, on an issuer-weighted basis, been less than for similarly rated corporate bonds, says Moody's. The two largest defaulters in the study, Russia and Argentina, both saw some of the lowest recovery rates for their bonds, but these rates are still similar to the average corporate experience.
Moody's also shows that spreads on sovereign bonds are generally tighter than for similarly rated corporate bonds, suggesting that markets already factor the better recoveries and default rates into pricing.
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