PBC 1137353 1

SOVEREIGN AND SUPRANATIONAL
SECTOR IN-DEPTH Sovereign Defaults Series

2 April 2019
FAQ: The increasing incidence of local
currency sovereign defaults
TABLE OF CONTENTS Summary
Summary 1 Despite the ability of sovereigns to “print” money, government defaults on local currency
How frequent are sovereign defaults debt have become almost as frequent as government defaults on foreign currency debt. This
on local currency debt? 2
Why are sovereign defaults on local
report reviews the historical evidence and answers frequently asked questions about the rise
currency debt rising? 3 of local currency sovereign defaults.
What are the causes of government
defaults on local currency debt? 4 » How frequent are sovereign defaults on local currency debt? These defaults are
Given their ability to 'print' money, almost as frequent as defaults on foreign currency debt and joint local and foreign
why do governments default on local
currency debt? 7
currency defaults have risen dramatically. In the post-1997 modern era of sovereign debt,
Which tends to happen first during there have been 40 sovereign bond defaults, 35% of which were foreign currency-only
a crisis: a default on foreign or local defaults, 25% were local currency-only defaults and 32% were joint foreign and local
currency obligations? 7
currency defaults. For the remaining 8%, resolution is still in progress.
How strongly does debt composition
correlate with default risk? Do » Why are sovereign defaults on local currency debt rising? Three key developments
countries that default on local
currency bonds have a larger share of have contributed to the increase: (1) deepening of local currency debt markets; (2) a shift
local currency debt? 8 in sovereign crisis resolution practices toward more comprehensive debt restructurings;
How do recoveries on local currency and (3) improved relative capacity to service foreign currency debt.
debt compare with those on foreign
currency debt? 10
» Why do governments default on local currency debt? There are several fundamental
What is Moody's approach to
assigning local vs foreign currency causes: (1) the spillover of foreign exchange crises to the government balance sheet in
sovereign ratings? 10 local currency; 2) the spillover of banking crises to the government balance sheet; (3)
Appendix I. The largest sovereign the printing of money to finance government borrowing resulting in hyperinflationary
defaults in history included defaults
on both local and foreign currency pressures and a government default; and (4) a high debt burden in local currency.
instruments 12 Ultimately, the reasons for default on local and foreign currency debt are not as different
Appendix II. Sovereign bond defaults as they might first appear; both could be avoided by printing money to excess at the risk
since 1997 - Selected debt metrics 14
Moody’s related publications 15
of hyperinflation and a collapse of the exchange rate.
» How do recoveries on local currency debt compare with those on foreign currency
debt? There is no systematic difference in bond recovery rates by currency.
Contacts
Elena H Duggar +1.212.553.1911
Associate Managing Director
elena.duggar@moodys.com
Qiuyang Li +1.212.553.3780
Analyst/CSR
claire.li@moodys.com THIS REPORT WAS REPUBLISHED ON 5 FEBRUARY 2020 WITH CORRECTED LAW OF ISSUANCE FOR PAKISTAN’S
FOREIGN CURRENCY BONDS, PART OF THE 1999 DEFAULT EVENT.
» Contacts continued on last page
MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
» What is Moody's approach to assigning local vs foreign currency sovereign ratings? Our rating practices reflect the
economic and market changes over time, as well as the empirical patterns of sovereign defaults. We currently assign the same
rating on both local currency and foreign currency sovereign debt, except for rare cases as described in our Sovereign Bond Ratings
methodology. The recent history of sovereign defaults does not support a credit quality differentiation in favor of either local or
foreign currently debt in terms of either default or recovery rates.
How frequent are sovereign defaults on local currency debt?

Sovereign defaults on local currency debt have become almost as frequent as defaults on foreign currency debt. The growth in
sovereign issuance in local currency over time has resulted both in a rise in defaults on local currency debt and in a dramatic increase in
the frequency of simultaneous defaults on debt denominated in local and foreign currency.
In the post-1997 modern era of sovereign debt, there have been 40 defaults on sovereign bonds. As Exhibits 1 and 2 show, of the
40 defaults, 35% were foreign currency-only defaults, 25% were local currency-only defaults and 32% were joint foreign and local
currency defaults, with the resolution of the remaining 8% of cases still in progress.
Exhibit 1
Sovereign defaults on local currency (LC) and foreign currency (FC) bonds, 1997-2018
LC bonds only FC bonds only LC and FC In progress
5
4
Number of defaults
0
1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Sample includes both rated and unrated issuers.

Source: Moody's Investors Service
Further, as Exhibit 2 shows, the occurrence of joint foreign and local currency defaults has risen more than tenfold, resulting in a
marked difference in default type in 1997-2018 compared with 1975-96.
Overall, there have been 63 sovereign bond defaults since 1975, with the resolution of three cases still in progress. Of the 60 resolved
cases, 26 defaults (or 43%) consisted of foreign currency bonds only, 20 (33%) consisted of local currency bonds only, and the other
14 (24%) consisted of a joint default on foreign and local currency bonds. See box below for a discussion of the data on sovereign loan
defaults.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the ratings tab on the issuer/entity page on
www.moodys.com for the most updated credit rating action information and rating history.
2 2 April 2019 Sovereign Defaults Series: FAQ: The increasing incidence of local currency sovereign defaults
Exhibit 2
Joint government defaults on local currency (LC) and foreign currency (FC) bonds have risen dramatically since 1997
Incidence of sovereign bond defaults in 1975-1996 (left) and 1997-2018 (right)
LC and FC
In progress
4%
8%
LC bonds only
25%
LC bonds only
44% LC and FC
32%
FC bonds only
52%
FC bonds only
35%
1975-1996, sample size: 23 1997-2018, sample size: 40
Data in the exhibit refers to defaults on sovereign bonds, which are relatively well documented. Data on sovereign loan defaults, which were prevalent in the 1980s, shows a similar pattern,
however historical sovereign defaults on local currency bank loans are not well documented (see box below). List of default cases since 1997 is in Appendix II.
Local currency sovereign defaults on bank loans are less well-documented, especially prior to 1997
Given the changes in sovereign debt markets over time, the data availability on recovery rates, and because historical defaults on sovereign
bonds are better documented than those on bank loans, we focus the discussion of this study on sovereign bond defaults. The available data
on sovereign defaults on bank loans shows the same pattern of increasing incidence of default on local currency and joint local and foreign
currency debt in more recent periods. However, data on bank loan defaults is well documented for foreign currency but not for local currency
loans, especially before 1997. For an overview of sovereign defaults on bank loans, see Sovereign Defaults Series: IMF Program Participation
Underscores Medium-Term Sovereign Credit Challenges, August 2013. For our definition of default, see Rating Symbols and Definitions.
Over a longer historical period, Reinhart and Rogoff (“This Time Is Different,” 2009) show that since 1800 domestic debt defaults have been
much more common than previously thought.1 Reinhart and Rogoff use a wider definition of “default” than we do, but they show that if
both explicit and implicit (for example, through inflation) “defaults” on domestic debt are included, there has been no statistically significant
difference in the incidence of default on local versus foreign currency debt since World War II. The authors also acknowledge the lack of
transparency on domestic debt time series.
Why are sovereign defaults on local currency debt rising?

Three key developments have contributed to the occurrence of sovereign defaults on local currency debt, as well as the increase in the
joint occurrence of defaults on both foreign and local currency-denominated debt:
1. The deepening of local currency debt markets, which has led to a dramatic increase in local currency debt;
2. A shift in sovereign crisis resolution practices toward more comprehensive debt restructurings;
3. Both developments accompanied by an improved relative capacity to service foreign currency debt, which has made foreign
currency debt less risky relative to local currency debt.
Sovereign local currency debt markets have deepened dramatically

Starting in the 1990s, sovereign debt markets have undergone fundamental changes: sovereign financing generally shifted from
predominantly foreign currency-denominated bank loan financing in the 1970s and 1980s to foreign and local currency bond financing
in the 1990s and especially post-2000. As Exhibit 3 shows, local currency bond financing in emerging market countries has risen
markedly over the past two decades. This growth has been spurred by the development of domestic capital markets – in terms of both
increased volume and liquidity and increased transparency, by increased current and capital account mobility, and by improved quality
of economic policies. For example, increased central bank independence has been accompanied by more stable monetary policy and a
shift toward inflation targeting in many emerging market countries. This has reduced the scope for emerging market governments to
monetize their local currency debt. Further, the accumulation of foreign exchange reserves by many countries has strengthened their
government’s relative ability to service debt in foreign currency.
Exhibit 3 shows the average share of gross general government debt denominated in local currency for a sample of 49 emerging market
countries. That share increased from 48% in 2000 to 64% in 2013, then fell slightly to 59% in 2018. A broadening of the investor
base has also driven the deepening of local currency debt markets as foreign investors have held more local currency debt over time
and domestic investors have held more foreign currency debt, as Exhibit 4 shows.2 (For details, see The evolution of emerging market
sovereign debt: Dramatic growth in local currency sovereign debt is reducing emerging market financial vulnerabilities, September 5,
2015.)
Exhibit 3 Exhibit 4
Evolution of emerging market government debt by currency Average share of EM sovereign local currency (LC) debt vs average
composition, 2000-18 share of resident holdings, 2000-18
General government FC debt General government LC debt/general government debt
General government LC debt (China) General government domestic debt/general government debt
General government LC debt (excl. China) 70
7
65
6
5 60
US$ trillion
4
%
55
3
50
2
45
1
- 40
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
2012
2013
2014
2015
2016
2017
2018
Sample includes 49 emerging market sovereign debt issuers from 2000 to 2018. Sample includes 49 emerging market sovereign debt issuers. Debt breakdown by residency
Source: Moody's Investors Service is not complete for 2018. Domestic debt refers to LC and FC debt held by residents.
Sovereign debt restructurings have become more comprehensive

The second factor in the rising share of local currency defaults is the move in sovereign debt crisis resolution practices toward
addressing sovereign debt problems comprehensively, by restructuring the overall sovereign debt load rather than restructuring
individual debt instruments. The evolution of the legal features of sovereign bond contracts, such as the growing use of collective
action clauses and exit consents,3 has facilitated this move to larger debt restructurings and has also contributed to shortening the
time of debt restructurings. Despite the potentially wider investor base of sovereign bonds compared to bank loans of the past, the
average debt restructuring of sovereign bonds since 1997 is about seven months, compared with more than seven years for bank
loan restructurings in the 1970s and 1980s. (See Sovereign Defaults Series: The role of holdout creditors and CACs in sovereign debt
restructurings, April 10, 2013.)
Relative capacity to service foreign currency debt has improved as well

At the same time, the accumulation of foreign exchange reserves in many countries since the Asian financial crisis of 1997 and the
increased flexibility of exchange rate regimes over time have increased governments’ relative capacity to service foreign currency
debt. This development has reduced the relative riskiness of foreign currency debt relative to local currency debt. For example, as we
narrowed the gaps between our local currency and foreign currency government bond ratings post 2000, many rating gaps closed as a
result of an increase in the foreign currency government bond rating to the level of the local currency government bond rating.
What are the causes of government defaults on local currency debt?

Government defaults on local currency obligations have several fundamental causes:
1. The spillover of foreign exchange crises to the government balance sheet in local currency;
2. The spillover of banking crises to the government balance sheet, causing a sovereign debt crisis;
3. The “printing” of money to finance government borrowing resulting in hyperinflationary pressures and a government default; and
4. The high debt burden in local currency.
The case of Venezuela in 1998 represents a separate episode in which the government default on local currency obligations resulted
from institutional weaknesses and administrative delays, but such cases are relatively rare.
The reasons for default on local currency debt and on foreign currency debt are not as different as they might first appear: all of the
factors listed above have led to defaults on both local and foreign currency debt instruments. Exhibit 5 summarizes the drivers of
default.
Exhibit 5
The causes of modern-era local currency sovereign defaults
Defaults on local and foreign currency debt share similar origins
Economic stagnation and currency crises Banking crises Hyperinflation
» Chronic economic stagnation, a weak » Systemic banking crises and capital » Monetary financing of the
fiscal position and domestic outflows contributed to a large and government deficit led to a vicious
vulnerabilities, combined with large sudden buildup of public debt and circle between rising inflation and
external shocks and loss of investor eventually triggered a government rising interest rates, which quickly
confidence, culminated in a sovereign default spiraled out of control and resulted
default in a sovereign default
Russia (1998), Ukraine (1998), Argentina (2001) Ecuador (1999), Cyprus (2013) Argentina (1989)
High debt burden Political and institutional weaknesses

» Persistent external and fiscal » Institutional weaknesses and
imbalances built up to an administrative delays caused missed
unsustainably high debt burden. Slow debt payments beyond contractual
buildup of debt and a deterioration in grace periods
debt affordability eventually resulted in
a sovereign default
Jamaica (2010, 2013), Greece (Mar. 2012, Dec.

Venezuela (1998)
2012), Barbados (2018)
Financial market deepening and liberalization have increased spillovers between the government balance sheet in foreign
currency and in local currency
Globalization, financial market liberalization and increased capital mobility have transformed sovereign funding markets since
the 1990s, as a result of the development of local currency bond markets and the entrance of foreign investors in local currency
government debt, and as banking systems continued to develop and internationalize. In the 1970s and 1980s, local currency debt was
mostly issued under local law and held by domestic resident investors, while foreign currency debt was issued under foreign law (mostly
New York or English law) and held by foreign investors.
Today, despite some reversal in the trend since 2015, the currency and residency-base lines are blurred. As we discussed above, foreign
investors hold much more local currency debt and more foreign currency debt is issued domestically. Further, after several decades of
liberalization, there are much fewer restrictions on capital mobility across countries. As a result, crises typically spill over between the
external and domestic sectors of an economy. For example, a currency crisis can easily spill over into a banking crisis, and a banking
crisis can easily trigger a currency crisis. And both can trigger a sovereign debt crisis.
For instance, concerns that local currency debt may not be repaid could prompt capital outflows, triggering a foreign exchange crisis
and an abrupt increase in the government’s foreign currency debt burden in local currency terms. Conversely, a default on foreign
currency debt would be accompanied by capital outflows and shaken confidence of local currency creditors. This dynamic could result
in a sell-off of local currency debt, leading to higher interest rates and strains on the government’s ability to repay its local currency
debt. In addition, capital outflows and funding pressures would typically weaken the domestic banking system, potentially triggering a
banking crisis, deposit freezes and eventually a local currency government default.
A further potential channel of contagion is that a government default on its foreign currency debt would likely deprive private
companies and banks from external financing, thereby causing instances of financial distress that may necessitate government bailouts.
Such an outcome would further weaken public finances.
The large sovereign defaults of Russia in 1998 and Argentina in 2001 illustrate such triple crises (simultaneous foreign exchange,
banking and sovereign debt crises) and spillovers across the sectors of the economy. In both cases, stagnating economic conditions,
weak fiscal positions and domestic vulnerabilities all combined with large external shocks and a loss of investor confidence. A vicious
circle of economic distress, capital outflows, currency crises and banking crises culminated in a sovereign default (see Appendix I for
details).
Further, the defaults of Ecuador in 1999 and Cyprus in 2013 are examples of systemic banking crises and capital outflows contributing
to a large and sudden buildup of public debt. These events culminated in sovereign defaults as debt levels and debt servicing costs rose
sharply.
Diversification of the investor base has further increased spillovers
The diversification of the investor base for sovereign debt has not only meant a larger likelihood of spillovers between a sovereign's
local currency and foreign currency balance sheets, but also less ability for a sovereign to potentially discriminate across creditors
by targeting specific debt instruments in a debt restructuring. Further, the increase in the domestic investor base by itself would not
have a unidirectional influence on a government’s debt restructuring decision ex ante. Local currency/local law debt may be easier
to restructure, but at the same time it could be politically more costly by imposing losses on resident creditors. It could also be
economically more costly by affecting the domestic banking system, which is typically a large holder of sovereign debt.
Hyperinflationary pressures can also result in government default

Attempts to resolve sovereign debt crises by printing money have usually resulted in escalating hyperinflation and sovereign default.
Many defaults during the Latin American debt crisis of the 1980s illustrate this dynamic. Printing money could work temporarily to
fund government spending in normal times, but in a crisis printing money results in hyperinflation. A vicious spiral forms between rising
inflation and rising interest rates on government debt, which investors demand in order to hold extra debt. As a result, things quickly
spiral out of control. The Latin American episodes of the 1980s suggest that this dynamic typically unravels over a few short months
and results in a sovereign default.
One infamous example is Argentina’s 1989 default. During the late 1980s, rapidly rising interest rates dramatically increased the
cost of servicing the central bank’s large portfolio of interest-bearing debt, ultimately outstripping its ability to issue new debt to
finance existing obligations. As the debt swelled, interest rates rose, resulting in heavy pressure on the exchange rate, devaluation and
hyperinflation. In January 1990, the government announced the BONEX plan, which converted time deposits into 10-year, dollar-
denominated treasury bonds. The central bank planned to use these bonds to pay off its debts with commercial banks, and those
banks were to use the bonds to pay their depositors. The BONEX plan's partial expropriation of deposits and default on domestic debt
ultimately resolved the public sector's solvency problem and the banking crisis, and laid the groundwork for the 1991 convertibility law,
which eventually succeeded in controlling inflation.
Debt structure plays a role

In line with the reasoning above, a very high debt burden in local currency accounted for the underlying cause of a number of recent
defaults. These episodes include the defaults of Jamaica in 2010 and 2013, Greece in 2012 and Barbados in 2018. These defaults were
rooted in persistent external and fiscal imbalances, which built up over time to an unsustainably high debt burden. The debt dynamics
were generally characterized by a slow buildup of debt and a deterioration in debt affordability over many years because of terms-
of-trade shocks or unsustainable fiscal policies. The defaults occurred when governments had high debt-to-GDP ratios and interest
payments-to-revenue ratios. A meaningful debt restructuring required the inclusion of local currency debt, which represented most the
debt load at the time.
Given their ability to 'print' money, why do governments default on local currency debt?
Printing money may not be a more attractive policy option than debt restructuring and will weigh on both local and foreign currency
default risk. Theoretically, countries with their own currency and debt denominated in local currency have the capacity to print money
to avoid default. Indeed, as the IMF (2012)4 and Reinhart and Sbrancia (2015)5 show, inflation has been responsible for a large share of
the debt reduction in advanced economies since World War II. However, restoring fiscal solvency by inflating debt carries economic,
social and political costs. Sovereigns need to generate large inflation surprises to have a material impact on fiscal solvency, and printing
money may not be a more attractive policy option than debt restructuring.
For countries with global reserve currencies and credible central banks, the “fiscal space” of the sovereign is likely larger than that of the
treasury alone, as they can benefit from the ability of the central bank to purchase government debt. The larger the perceived degree
of monetary sovereignty, the larger the “consolidated fiscal space” is likely to be, as the example of Japan illustrates. Japan's central
bank currently holds a large amount of government debt while funding costs remain very low. However, no country has unlimited
fiscal space. In a country with strong monetary sovereignty, the first rapid expansion of the money supply might have little impact on
inflation or government funding costs. But at some point, inflation could surge above the new target level and be difficult to decrease.
In turn, this would pressure the exchange rate and government funding costs.
In a country with weak monetary sovereignty, demand for money can be much more sensitive to movements in inflation or exchange
rates, owing to a history of inflation and devaluation. In that case, inflation, dollarization and devaluation could be more rapid.
Finally, investor reactions are nonlinear during crises. In such periods, funding costs tend to rise in a nonlinear fashion, thus creating a
vicious circle between inflation, rising debt and rising funding costs. Moreover, long-term, fixed-rate domestic debt may be easier to
pay off by printing money. But in countries where the risk of money finance is high, governments tend to be pressed by market forces
into issuing ever shorter-term debt or floating interest rate debt – thus, reducing the government's ability to inflate away the debt.
As we said above, ultimately the reasons for default on local and foreign currency debt are not as different as they might first appear;
both could be avoided by printing money to excess at the risk of hyperinflation and a collapse of the exchange rate. For local currency
debt, printing money is an obvious means of repayment, which if large enough will inevitably lead to inflation - which if large enough
will in turn lead to a collapse in the exchange rate. For foreign currency debt, printing money can be exchanged for ever-decreasing
amounts of foreign exchange, which will result in a collapse the exchange rate, and will inevitably lead to inflation. These are the two
sides of the same coin.6
Which tends to happen first during a crisis: a default on foreign or local currency obligations?
A careful look at the sequencing of historical defaults among the cases that experienced a joint local and foreign currency default,
summarized in Exhibit 6, reveals that there is no clear pattern in terms of default sequencing. When governments have defaulted on
both foreign and local currency obligations during a crisis, they have generally occurred either at the same time, or very close in time.
Foreign currency bond defaults occurred first in four cases, local currency bond defaults occurred first in two cases, and the two types of
defaults occurred together in the other eight cases.
Exhibit 6
No clear pattern of sequencing during joint local (LC) and foreign currency (FC) sovereign bond defaults, 1975-2018
Country (NR = not rated at the
Initial default time) Default timing Sequence
1989 Argentina Default on LC and FC bonds at end of 1989 Together
1998 Russia LC bond default (GKO and OFZ) in August 1998; FC bond default (MIN FIN III) in May 1999 LC first
1998 Ukraine LC bond default in August 1998; FC bond default in September 1998. (Another FC default on eurobonds in LC first
January 2000)
1999 Ecuador Default on FC bonds in August, then LC bonds in September 1999; restructured both in August 2000 FC first
2001 Argentina Default on domestic bonds in November 2001 and restructured in December 2001, followed by attempts to Together
restructure both FC and LC external debt
2003 Paraguay (NR) Restructured domestically issued dollar-denominated bonds defaulted on in 2003, then restructured domestic FC first
LC bonds
2004 Grenada (NR) Missed interest payment on international bonds (US$ and EC$) in December 2004; restructured domestic and Together
external debt in both currencies in November 2005
2010 Jamaica Restructured local currency (fixed, variable, and US$-indexed) securities and US$-denominated debt in Together
February 2010
2011 Côte d’Ivoire (NR) FC bond default in January 2011; restructured short-term paper in December 2011 FC first
2011 St. Kitts and Nevis (NR) Default on LC and FC bonds in November 2011; restructured both bonds in April 2012 Together
2012 Greece Default on LC and FC bonds in February 2012 (Debt buyback in December 2012) Together
2013 Jamaica Restructured local currency (fixed, variable, and US$-indexed) securities and US$-denominated debt in Together
February 2013
2013 Grenada (NR) Default on LC and FC bonds in March 2013 Together
2018 Barbados Missed interest payments on FC bonds in June 2018; completed a formal debt exchange for LC bonds in FC first
November 2018
How strongly does debt composition correlate with default risk? Do countries that default on local
currency bonds have a larger share of local currency debt?
In several cases, debt composition clearly had an influence on debt restructuring decisions. For example, in the case of Belize in 2006
and the Dominican Republic in 2005, the government defaults were on foreign currency debt because there were almost no local
currency bonds at the time. In the more recent cases of Greece in 2012, Cyprus in 2013 and Barbados in 2018, achieving any significant
debt reduction would have required the restructuring of local currency debt given it represented most of the debt stock. For less
extreme debt composition, however, the experience varies across countries.
As Exhibits 7-10 illustrate for defaults since 1997, countries that defaulted only on foreign currency bonds had on average a higher
External Vulnerability Indicator (EVI) compared to other defaulters and a slightly higher share of foreign currency debt in their total
debt stock. Also, countries that defaulted only on local currency bonds had on average lower EVI ratios. Nevertheless, the difference in
the share of foreign currency debt was much less significant between local currency-only defaulters and joint local and foreign currency
defaulters, and for all metrics the standard deviation around the average is very large across countries, reflecting the various causes of
the defaults and the spillovers between the external and the domestic sectors of an economy that we discussed above. (Selected debt
metrics by default case since 1997 are in Appendix II.)
Exhibit 7 Exhibit 8
Share of foreign currency debt Dollarization ratio
Average ratio against min and max in dotted line, 1997-2018 Average ratio against min and max in dotted line, 1997-2018
Share of FC debt (year before crisis) Share of FC debt (year of crisis) Dollarization ratio* (year before crisis) Dollarization ratio (year of crisis)
100 100
90 90
74.6 80.0
80 73.4 80
68.3
70 70
62.3
60.2 60
60
%
50
%
50
40 32.8 32.6 36.2

40 34.0
32.6
30 30 24.5
20 20
10 10
0 0
FC only LC only FC and LC FC only LC only FC and LC
FC general government debt includes foreign currency-indexed debt. * Dollarization ratio = total foreign currency deposits in the domestic banking system/
Source: Moody's Investors Service total deposits in the domestic banking system.
Exhibit 9 Exhibit 10
External Vulnerability Indicator (EVI) Dollarization vulnerability
Average ratio against min and max in dotted line, 1997-2018 Average ratio against min and max in dotted line, 1997-2018
EVI* (year before crisis) EVI (year of crisis) Dollarization vulnerability* indicator (year before crisis)
500 Dollarization vulnerability indicator (year of crisis)
300
450
390.2
400 250
350
286.0 279.2 200
300
%
250
150
200
150.8 100.7
150 100
71.9 77.3
63.5
100 45.4 50.6
67.0 55.3 50
50
0 0
FC only LC only FC and LC FC only LC only FC and LC
* EVI = (short-term external debt + currently maturing long-term external debt + total * Dollarization vulnerability = total foreign currency deposits in the domestic banking
nonresident deposits over one year)/official foreign exchange reserves; EVI in Venezuela system/(official foreign exchange reserves + foreign assets of domestic banks).
exceeds 1330 for both years. Source: Moody's Investors Service
Further, as the lines between currency of denomination, domestic versus external investor base, and domestic versus external law in
sovereign debt loads have started to blur over time, these trends have been reflected in the nature of the sovereign debt restructurings.
For most historical defaults, foreign currency bonds were issued under foreign law and held mostly by nonresidents, while local
currency bonds were issued under local law and held domestically. But this pattern has become increasingly less delineated.
For example, Pakistan’s 1999 default included foreign currency bonds issued under English law and held both domestically and
externally, and Jamaica’s 2010 and 2013 defaults included foreign currency bonds issued under local law and held domestically.
Similarly, Dominica’s 2003 default included local currency bonds issued under English law and held both domestically and externally.
In addition, the debt exchanges in Paraguay in 2004 and in Nicaragua in 2003 and 2008 involved bonds denominated in local currency
but indexed to the US dollar. Therefore, exchange rate movements influenced debt service on the bonds. Finally, the defaults in Greece
in 2012 and in Cyprus in 2013 included bonds denominated in euros, while the defaults in Dominica in 2003, Grenada in 2004 and
2013, and St. Kitts and Nevis in 2011 and 2013 included bonds denominated in Eastern Caribbean dollars. We denote these defaults
as “local currency” for the purposes of this study, but they share characteristics of both local and foreign currency defaults. The debt
service on the bonds is delinked from exchange rate movements, but at the same time monetary policy is determined at the level of
the currency area.
How do recoveries on local currency debt compare with those on foreign currency debt?
There is no systematic difference in recovery rates between foreign and local currency bonds in the 1997-2018 period. As Exhibit
11 shows, across individual default cases, sometimes foreign currency bonds have had higher recovery rates, while at other times
recoveries have been higher for local currency bonds. In a number of cases, bonds denominated in the same currency have had different
recovery rates depending on whether they were part of the domestic or external debt exchanges, which had different terms. Moreover,
as we discussed above, sovereigns have often been unsuccessful in limiting restructurings to one kind of debt instrument or currency.
Exhibit 11
Recovery rates on local currency (LC) and foreign currency (FC) sovereign bonds, 1997-2018
Local currency recovery rate Foreign currency recovery rate Average LC recovery rate Average FC recovery rate
100
90
80
70
60
%
50
40
30
20
10
0
1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016 2017 2018
Recovery is measured as the average trading price in % of the par value of the bond at the time of the initial default event, 30-day post-default for missed payments or around the close of
an exchange for distressed debt exchanges. When the trading price is not available, we calculate an equivalent measure estimating the recovery as the ratio of the present value of the cash
flow of the new debt instruments received as a result of the distressed exchange versus the outstanding face value of those initially promised, discounted by an approximated market yield
at the time of default. Data is not available for three local currency cases.
Sources: Moody's Investors Service; IMF for Mongolia 1997 LC and Grenada 2013 LC; Sturzenegger and Zettelmeyer (2005) for Russia 1998 LC.
Over the 1997-2018 period, we estimate a similar issuer-weighted recovery rate of about 60% for both local currency and foreign
currency bonds, with a very wide variation across countries for both local and foreign currency defaults. Because trading prices are not
available for all default cases, some of the estimates are approximate.7 8
The seminal academic research by Sturzenegger and Zettelmeyer (2005), which analyzes bond-by-bond recovery rates in the sovereign
debt crises of the 1990s, uses a different methodology than we do for estimating recovery rates, but has similar findings.9 Sturzenegger
and Zettelmeyer conclude that domestic residents do not appear to have been treated systematically better or worse than foreign
residents in sovereign debt restructurings. Further, becauses investors holding many different bonds are typically offered a limited
menu of new bonds in the debt exchange, recovery rates may also vary somewhat depending on the bonds' maturity, but there is no
systematic relationship between the remaining life of the debt instruments and the recovery rate across default cases. (See Appendix I
for the examples of Russia in 1998, Argentina in 2001 and Greece in 2012.)
What is Moody's approach to assigning local vs foreign currency sovereign ratings?

Our current practice is to assign the same rating on both local currency and foreign currency debt, except for rare cases as described
in our Sovereign Bond Ratings methodology. Our rating practices have reflected the economic and market developments discussed
above, as well as the empirical patterns of sovereign defaults, by narrowing the gaps between foreign and local currency ratings post
2000.10
The justification for distinguishing between local and foreign currency government bond ratings is limited because (1) both current and
capital account openness have increased across countries; (2) capital markets (especially those in emerging markets) have liberalized
and deepened; and (3) governments’ investor bases have broadened and partially moved offshore. Crucially, problems in servicing debt
in one currency are likely to spill over and affect a government’s ability to service its debt in another. The recent history of sovereign
defaults supports this conclusion. Therefore, there is no strong justification for credit quality differentiation in favor of either local or
foreign currency debt.
We now only apply a rating distinction (a notching between a government’s local and foreign currency bond ratings) in rare cases
where there is (1) limited capital mobility; and (2) a government either facing extreme constraints in terms of external liquidity, or, in
exceptional cases, showing a material and observable distinction between its ability and willingness to repay creditors in local versus
foreign currency, or vice versa. (The fulfillment of the latter criterion in favor of foreign currency creditors could, in rare cases, give rise
to a rating distinction in favor of foreign currency obligations.)
However, even if these two necessary conditions are met, different local and foreign currency ratings for the same country are not
certain. For example, we may rate bonds at the same level if we believe that the two conditions could evolve over the foreseeable
future – for instance, if a government were likely to open up the capital account of the balance of payments, or if a country’s external
position were likely to improve considerably.
The size of any rating distinction in favor of local currency obligations depends on the severity of the external liquidity constraint. Any
distinction larger than two notches (either positive or negative) would be very rare since it would suggest a starker segregation between
a government’s local and foreign currency operations than would be justified by historical experience. This is supported by the increase
in default probability historically associated with each notch of differential.
A recent rare example is the case of Argentina during the 2013-15 period, when we maintained a lower rating on Argentina’s foreign
law obligations relative to its domestic law debt, in order to reflect the increased default risk on these bonds deriving from the then-
ongoing legal proceedings in US courts. (See Moody's downgrades Argentina's foreign law bonds to (P)Caa1, affirms B3 issuer rating,
outlook negative, 15 March 2013.)
Appendix I. The largest sovereign defaults in history included defaults on both local and foreign
currency instruments
The three largest sovereign defaults are Russia's default on $73 billion of debt in 1998-99, Argentina's default on $82 billion of debt
in 2001-02, and Greece's default on $261 billion of debt in 2012. All three cases involved defaults on both local currency and foreign
currency instruments. (The case of Venezuela will likely be large in terms of debt involved as well, but is currently still in progress.)
Russia
The Russian default of 1998-99 was the first default of a major sovereign borrower since the 1980s. The default occurred in the context
of severe economic distress. Economic activity had stagnated and the country had chronic budget deficits in the years preceding the
crisis. Also, oil and nonferrous metals prices were weak and market sentiment became unfavorable after the Asian financial crisis of
1997. A significant drop in oil prices in late 1997 and early 1998 led to a serious shortfall in federal budget revenue, while the stock of
short-term treasury bills grew rapidly. With East Asian economies in crisis and uncertainty about the sustainability of domestic policies
building, market sentiment shifted and nonresident investors decided to pull out of the Russian treasury bill market. The pressures in
the domestic market spilled over to the external sector. Capital outflows led to a rapid fall in foreign exchange reserves as the central
bank intervened to support the domestic currency.
Russia defaulted on both local currency and foreign currency debt. In August 1998, Russia stopped payments first on local currency
treasury obligations, which represented the larger payment coming due. It later defaulted on its domestic foreign currency obligations
(MIN FIN III bonds) in May 1999. Russia did not default on its eurobonds in 1998 because debt service on the bonds did not require
many outlays until the principal on the first issue was due in 2001. Also, Russia did not wish to default on external debt for historical
and reputational reasons. Debts were restructured in May 1999, February 2000 and August 2000. Based on trading prices after default,
we estimate an 82% loss rate for foreign currency bonds. Using a different methodology, Sturzenegger and Zettelmeyer (2005)
estimate similar average haircuts for local currency treasury bills held by nonresidents and for foreign currency instruments, and a
smaller average haircut for local currency treasury bills held by residents.11
Argentina
Argentina’s default in 2001-02 surpassed Russia's in terms of the amount of debt involved. The episode involved banking, currency
and debt crises in the middle of a severe political crisis. Argentina had operated under a currency board arrangement pegging the peso
to the dollar since 1991, which had provided price stability in the context of memories of past hyperinflations and financial stability
given the degree of dollarization of the economy. However, after the devaluation of the Brazilian real in 1999 and the international
revaluation of the dollar, the peso had become overvalued against its major trading partners, leading to a drying-up of exports and
foreign investment. The combination of the hard peg, growing public debt and an enduringly weak fiscal position proved unsustainable
in the context of the fourth year of an economic recession and the capital flow reversal of 2001.
Very high and rising spreads (the country risk premium exceeded 2,000 basis points) made it increasingly difficult for Argentina to
meet debt service on rolled-over debt. As a result, in November 2001 Argentina announced its intention to restructure both local
currency and foreign currency debt. It carried out Phase 1 of the restructuring in December 2001. This phase, aimed at domestic
resident investors, involved the exchange of US dollar and Argentine peso bonds into new government-guaranteed loans. Phase 2
was aimed at restructuring foreign-held debt in 2002. The initial intention was to segment local and foreign bondholders to protect
domestic financial institutions and pension funds. But Phase 2 never materialized, owing to the deterioration in the financial and
political situation in the meantime. Instead, a “pesoization” of all domestic contracts took place. Argentina did not conclude a
successful foreign debt restructuring until 2005.
The recovery rates on local and foreign currency securities were similar. Based on trading prices after default, we estimate an 82% loss
rate for local currency bonds and a 71% loss rate for foreign currency bonds. Using a different NPV methodology, Sturzenegger and
Zettelmeyer (2005) estimate a higher loss for international bonds relative to the domestic debt - the opposite of the case of Russia.12
Greece
Greece’s default occurred in the context of the European debt crisis and set a new record in terms of restructured debt volume. It
represented the first major debt restructuring in Europe since World War II. The default took place during the fifth year of an economic
recession and at a time when the debt burden of the sovereign had reached more than 165% of GDP. The Greek debt crisis was
triggered in October 2009 when the newly elected government announced a much larger than previously expected budget deficit for
the year, and the fact that debt and deficit figures had been understated in previous years. Subsequent further budget deficit revisions
and negative economic outcomes resulted in eroded market confidence, rising sovereign bond yields and eventually a loss of market
access. Despite the unprecedented magnitude of the EU/IMF program for Greece, two debt restructurings followed in March and in
December 2012.
On February 24, 2012, Greece announced a debt exchange proposal affecting Greek law government bonds, foreign law government
bonds and bonds that have been issued by government-owned enterprises and guaranteed by the government. The exchange closed on
March 8, 2012 and involved €177 billion of debt governed by Greek law. With 85.5% of debtholders of Greek law bonds participating
in the exchange, the Greek authorities invoked the collective action clauses (retroactively inserted in the bonds by an act of Parliament
earlier in the month) to force the participation of holdout creditors (around €25 billion of the total €177 billion). A further €20 billion
of the €29 billion of bonds that were either issued by the sovereign under foreign law or issued by state-owned companies that were
guaranteed by the state, was committed as part of the exchange. Based on trading prices after default, we estimate a value-weighted
79% loss rate for local currency bonds and a 69% loss rate for foreign currency bonds. Using a different methodology, Zettelmeyer,
Trebesch and Gulati (2013) estimate bond-by-bond recovery rates and find large differences in haircuts across bonds – short-dated
bonds had higher NPV losses compared to long-dated bonds.13
On December 12, 2012, Greece's Public Debt Management Agency bought back €31.9 billion of debt (accounting for about half of the
previously restructured Greek government bonds) for €11.29 billion, funded by short-term notes of the EFSF, implying a 63% loss as
measured by trading prices.
Appendix II. Sovereign bond defaults since 1997 - Selected debt metrics
Dollarization Dollarization
FC or LC bond Share of FC Share of FC Dollarization Dollarization vulnerability vulnerability
Year Issuer default debt (Y-1) debt (Y) ratio (Y-1) ratio (Y) EVI (Y-1) EVI (Y) indicator (Y-1) indicator (Y)
1997 Mongolia (NR) LC … 92.7 … 41.0 … 35.7 … 25.4
1998 Venezuela LC 84.1 85.0 0.0 0.0 103.4 106.6 0.0 0.0
1998 Russia LC and FC 52.4 81.4 24.9 43.6 255.9 492.3 55.3 103.5
1998 Ukraine LC and FC 73.0 67.2 25.8 39.1 249.6 994.7 26.7 64.1
1999 Pakistan FC 49.0 48.5 30.0 12.3 902.0 449.1 289.6 78.3
1999 Ecuador LC and FC 81.4 78.4 … … 223.1 483.9 … …
1999 Turkey (NR) LC 52.4 49.5 45.3 47.5 242.8 204.0 85.5 86.6
2000 Côte d’Ivoire (NR) FC 78.0 85.4 16.4 14.8 … … 110.7 …
2000 Ukraine FC 60.5 56.4 43.7 38.4 618.4 593.2 56.1 65.3
2001 Argentina LC and FC 93.0 97.1 … … 249.4 262.1 198.8 313.7
2002 Moldova FC 60.9 60.6 44.8 47.2 41.2 85.6 34.5 41.7
2003 Dominica (NR) LC (EC$) and (FC 79.9 84.4 … … … … … …
loans)
2003 Uruguay FC 96.0 94.3 92.5 91.3 547.4 176.3 158.3 136.3
2003 Nicaragua LC 99.3 99.3 72.5 69.7 44.4 6.5 229.5 221.6
2003 Paraguay (NR) LC and FC 82.2 86.6 68.5 61.9 122.2 142.1 98.0 72.2
2004 Cameroon (NR) LC 79.0 80.0 … … … … … …
2004 Grenada (NR) LC (EC$) and FC 72.9 73.4 … … … … … …
2005 Dominican Republic FC 81.7 82.1 33.6 33.2 1057.9 359.1 238.0 71.4
2006 Belize FC 86.4 86.8 13.1 5.3 757.1 112.1 62.7 20.4
2008 Nicaragua LC 98.4 97.2 65.2 67.7 53.2 72.4 127.1 126.3
2008 Ecuador FC 100.0 100.0 100.0 100.0 933.6 406.7 161.9 172.3
2008 Seychelles (NR) FC 49.2 61.4 … … … … … …
2010 Jamaica LC and FC 46.7 48.9 41.6 37.4 112.5 63.3 63.7 52.1
2011 Côte d’Ivoire (NR) LC and FC 69.4 70.1 8.9 7.1 18.2 18.1 4.6 4.1
2011 St. Kitts and Nevis (NR) LC (EC$) and FC … … … … … … … …
2012 Greece LC (Euro) and FC … … … … … … … …
2012 Belize FC 84.3 83.9 4.2 9.3 38.2 44.7 13.1 25.9
2012 Greece LC (Euro) … 3.3 … … … … … …
2013 Jamaica LC and FC 41.7 45.7 39.6 42.5 105.3 125.7 67.3 67.0
2013 Cyprus LC (Euro) 0.0 1.0 … … … … … …
2013 Grenada (NR) LC (EC$) and FC … … … … … … … …
2013 St. Kitts and Nevis (NR) LC (EC$) … … … … … … … …
2014 Argentina FC 56.2 60.1 9.4 10.5 153.3 206.7 31.5 32.0
2015 Ukraine FC 60.9 70.0 45.9 45.3 245.1 695.7 132.9 68.0
2016 Mozambique FC 84.0 87.5 27.7 34.0 35.9 55.6 31.0 31.8
2017 Mozambique FC, in progress 87.5 83.8 34.0 28.1 55.6 60.1 31.8 22.6
2017 Belize FC 76.3 71.0 4.3 4.0 12.7 15.9 12.6 13.9
2017 Congo, Republic of FC, in progress 32.3 76.0 … … 21.1 52.7 … …
2017 Venezuela FC, in progress 92.1 99.1 0.2 0.0 1331.3 1337.1 2.1 0.0
2018 Barbados LC and FC 29.6 28.2 6.3 … 93.3 135.7 124.6 …
Average all 69.5 72.1 30.4 33.4 264.8 245.3 72.9 62.8
Foreign currency only 74.6 80.0 32.8 32.6 390.2 286.0 71.9 45.4
Local currency only 68.3 73.4 32.6 36.2 67.0 55.3 63.5 50.6
Foreign and local currency joint 62.3 60.2 24.5 34.0 150.8 279.2 77.3 100.7
NR = not rated at the time; Y denotes the year of sovereign default and Y-1 denotes the year preceding the sovereign default.
Moody’s related publications

Outlook
» Global Macro Outlook 2019-20 (February 2019 Update) – Global economy will continue to weaken throughout 2019 and into
2020, February 2019
» 2019 Outlook – Global credit conditions to weaken amid slowing growth and rising risks, November 2018
» Sovereigns – Global 2019 outlook still stable, but slowing growth signals increasingly diverging prospects, November 2018
Sector research
» Slow productivity growth will pressure sovereign debt sustainability, February 2019
» Private sector debt drives broad-based build-up of emerging markets external vulnerability risks, July 2016
» Caribbean Sovereigns: The silent debt crisis, February 2016
» Myths and facts about sovereign debt restructurings (presentation), January 2016
» The evolution of emerging market sovereign debt, September 2015
» Sovereign defaults series – the aftermath of sovereign defaults, October 2013
» The role of holdout creditors and CACs in sovereign debt restructurings, April 2013
» Sovereign defaults and interference: Perspective on government risks, August 2008
Methodology
» Rating Methodology: Sovereign bond ratings, November 2018
Topic Page
» Sovereign Default Research
To access any of these reports, click on the entry above. Note that these references are current as of the date of publication of this
report and that more recent reports may be available. All research may not be available to all clients.
Endnotes
1 Reinhart, Carmen and Kenneth Rogoff, 2009, “This Time Is Different,” Princeton University Press, Princeton and Oxford.
2 IMF, 2018, “Sovereign Investor Base Dataset for Emerging Markets”, shows that the share of sovereign debt held by foreign investors in a sample of 17
emerging markets rose to nearly 20% in the second quarter of 2018 from 8% in 2006. The Working Paper reference is Arslanalp, Serkan and Takahiro
Tsuda, 2014, “Tracking Global Demand for Emerging Market Sovereign Debt”, IMF Working Paper, WP/14/39, Washington, DC.
3 CACs allow a supermajority of creditors to amend the instrument’s payment terms and other essential provisions. Thus, CACs allow a supermajority of
bondholders to agree to a debt restructuring that is legally binding on all holders of the bond, including those who vote against the restructuring. Exit
consents use the modification clauses in the bond contract that allow a majority group of creditors to change the non-financial terms of the old bonds in
an exchange, in a way that impairs the value of the old bonds.
4 IMF, 2012, World Economic Outlook, Chapter 3: “The Good, the Bad, and the Ugly: 100 Years of Dealing with Public Debt Overhangs”.
5 Reinhart, Carmen M. and M. Belen Sbrancia, 2015, “The Liquidation of Government Debt,” IMF Working Paper WP/15/7, Washington, DC.
6 Currency unions fall closer to the “local currency” classification, but they have features that place them in between the local vs. foreign currency
classification. Countries in currency unions do not have the ability to print money, but they can benefit from liquidity support from the area's central bank.
7 Our annual Sovereign Default and Recovery Rates study examines sovereign default, transition and recoveries since 1983 and compares them to the
historical experience of corporate issuers. On average, over the 1983-2018 period, the sovereign recovery rate was 55%, comparable to the average
corporate recovery rate. Nevertheless, sovereign recovery rates varied widely, from 18% to 95%.
8 Mongolia's 1997 local currency recovery rate is based on IMF estimates in “Mongolia: Financial System Stability Assessment”, September 2008, IMF
Country Report No. 08/300; Grenada's 2013 local currency recover rate is based on IMF estimates in “Sovereign Debt Restructurings in Grenada: Causes,
Processes, Outcomes, and Lessons Learned”, IMF Working Paper, WP/17/171.
9 Sturzenegger, Federico and Jeromin Zettelmeyer, 2005, “Haircuts: Estimating Investor Losses in Sovereign Debt Restructurings, 1998-2005,” IMF Working
Paper 05/137, July.
10 Historically, we often made distinctions between a government’s local currency bond rating and foreign currency bond rating, with any gap usually in favor
of the local currency rating. However, this practice has gradually changed over time and by 2010 such rating gaps became infrequent.
Paper 05/137, July.
Paper 05/137, July.
13 Zettelmeyer, Jeromin, and Christoph Trebesch and Mitu Gulati, 2013, “The Greek Debt Restructuring: An Autopsy”, Economic Policy, Vol. 28, Issue 75, pp.
513-563, July.
© 2019 Moody’s Corporation, Moody’s Investors Service, Inc., Moody’s Analytics, Inc. and/or their licensors and affiliates (collectively, “MOODY’S”). All rights reserved.
CREDIT RATINGS ISSUED BY MOODY'S INVESTORS SERVICE, INC. AND ITS RATINGS AFFILIATES (“MIS”) ARE MOODY’S CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT
RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MOODY’S PUBLICATIONS MAY INCLUDE MOODY’S CURRENT OPINIONS OF THE
RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES. MOODY’S DEFINES CREDIT RISK AS THE RISK THAT AN ENTITY
MAY NOT MEET ITS CONTRACTUAL FINANCIAL OBLIGATIONS AS THEY COME DUE AND ANY ESTIMATED FINANCIAL LOSS IN THE EVENT OF DEFAULT OR IMPAIRMENT. SEE
MOODY’S RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S
RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE VOLATILITY. CREDIT
RATINGS AND MOODY’S OPINIONS INCLUDED IN MOODY’S PUBLICATIONS ARE NOT STATEMENTS OF CURRENT OR HISTORICAL FACT. MOODY’S PUBLICATIONS MAY
ALSO INCLUDE QUANTITATIVE MODEL-BASED ESTIMATES OF CREDIT RISK AND RELATED OPINIONS OR COMMENTARY PUBLISHED BY MOODY’S ANALYTICS, INC. CREDIT
RATINGS AND MOODY’S PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND CREDIT RATINGS AND MOODY’S PUBLICATIONS
ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. NEITHER CREDIT RATINGS NOR MOODY’S PUBLICATIONS
COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR. MOODY’S ISSUES ITS CREDIT RATINGS AND PUBLISHES MOODY’S PUBLICATIONS
WITH THE EXPECTATION AND UNDERSTANDING THAT EACH INVESTOR WILL, WITH DUE CARE, MAKE ITS OWN STUDY AND EVALUATION OF EACH SECURITY THAT IS UNDER
CONSIDERATION FOR PURCHASE, HOLDING, OR SALE.
MOODY’S CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY RETAIL INVESTORS AND IT WOULD BE RECKLESS AND INAPPROPRIATE FOR
RETAIL INVESTORS TO USE MOODY’S CREDIT RATINGS OR MOODY’S PUBLICATIONS WHEN MAKING AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT
YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER. ALL INFORMATION CONTAINED HEREIN IS PROTECTED BY LAW, INCLUDING BUT NOT LIMITED TO, COPYRIGHT LAW,
AND NONE OF SUCH INFORMATION MAY BE COPIED OR OTHERWISE REPRODUCED, REPACKAGED, FURTHER TRANSMITTED, TRANSFERRED, DISSEMINATED, REDISTRIBUTED
OR RESOLD, OR STORED FOR SUBSEQUENT USE FOR ANY SUCH PURPOSE, IN WHOLE OR IN PART, IN ANY FORM OR MANNER OR BY ANY MEANS WHATSOEVER, BY ANY
PERSON WITHOUT MOODY’S PRIOR WRITTEN CONSENT.
CREDIT RATINGS AND MOODY’S PUBLICATIONS ARE NOT INTENDED FOR USE BY ANY PERSON AS A BENCHMARK AS THAT TERM IS DEFINED FOR REGULATORY PURPOSES
AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
All information contained herein is obtained by MOODY’S from sources believed by it to be accurate and reliable. Because of the possibility of human or mechanical error as well
as other factors, however, all information contained herein is provided “AS IS” without warranty of any kind. MOODY'S adopts all necessary measures so that the information it
uses in assigning a credit rating is of sufficient quality and from sources MOODY'S considers to be reliable including, when appropriate, independent third-party sources. However,
MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the rating process or in preparing the Moody’s publications.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability to any person or entity for any
indirect, special, consequential, or incidental losses or damages whatsoever arising from or in connection with the information contained herein or the use of or inability to use any
such information, even if MOODY’S or any of its directors, officers, employees, agents, representatives, licensors or suppliers is advised in advance of the possibility of such losses or
damages, including but not limited to: (a) any loss of present or prospective profits or (b) any loss or damage arising where the relevant financial instrument is not the subject of a
particular credit rating assigned by MOODY’S.
To the extent permitted by law, MOODY’S and its directors, officers, employees, agents, representatives, licensors and suppliers disclaim liability for any direct or compensatory
losses or damages caused to any person or entity, including but not limited to by any negligence (but excluding fraud, willful misconduct or any other type of liability that, for the
avoidance of doubt, by law cannot be excluded) on the part of, or any contingency within or beyond the control of, MOODY’S or any of its directors, officers, employees, agents,
representatives, licensors or suppliers, arising from or in connection with the information contained herein or the use of or inability to use any such information.
NO WARRANTY, EXPRESS OR IMPLIED, AS TO THE ACCURACY, TIMELINESS, COMPLETENESS, MERCHANTABILITY OR FITNESS FOR ANY PARTICULAR PURPOSE OF ANY CREDIT
RATING OR OTHER OPINION OR INFORMATION IS GIVEN OR MADE BY MOODY’S IN ANY FORM OR MANNER WHATSOEVER.
Moody’s Investors Service, Inc., a wholly-owned credit rating agency subsidiary of Moody’s Corporation (“MCO”), hereby discloses that most issuers of debt securities (including
corporate and municipal bonds, debentures, notes and commercial paper) and preferred stock rated by Moody’s Investors Service, Inc. have, prior to assignment of any rating,
agreed to pay to Moody’s Investors Service, Inc. for ratings opinions and services rendered by it fees ranging from $1,000 to approximately $2,700,000. MCO and MIS also maintain
policies and procedures to address the independence of MIS’s ratings and rating processes. Information regarding certain affiliations that may exist between directors of MCO and
rated entities, and between entities who hold ratings from MIS and have also publicly reported to the SEC an ownership interest in MCO of more than 5%, is posted annually at
www.moodys.com under the heading “Investor Relations — Corporate Governance — Director and Shareholder Affiliation Policy.”
Additional terms for Australia only: Any publication into Australia of this document is pursuant to the Australian Financial Services License of MOODY’S affiliate, Moody’s Investors
Service Pty Limited ABN 61 003 399 657AFSL 336969 and/or Moody’s Analytics Australia Pty Ltd ABN 94 105 136 972 AFSL 383569 (as applicable). This document is intended
to be provided only to “wholesale clients” within the meaning of section 761G of the Corporations Act 2001. By continuing to access this document from within Australia, you
represent to MOODY’S that you are, or are accessing the document as a representative of, a “wholesale client” and that neither you nor the entity you represent will directly or
indirectly disseminate this document or its contents to “retail clients” within the meaning of section 761G of the Corporations Act 2001. MOODY’S credit rating is an opinion as to
the creditworthiness of a debt obligation of the issuer, not on the equity securities of the issuer or any form of security that is available to retail investors.
Additional terms for Japan only: Moody's Japan K.K. (“MJKK”) is a wholly-owned credit rating agency subsidiary of Moody's Group Japan G.K., which is wholly-owned by Moody’s
Overseas Holdings Inc., a wholly-owned subsidiary of MCO. Moody’s SF Japan K.K. (“MSFJ”) is a wholly-owned credit rating agency subsidiary of MJKK. MSFJ is not a Nationally
Recognized Statistical Rating Organization (“NRSRO”). Therefore, credit ratings assigned by MSFJ are Non-NRSRO Credit Ratings. Non-NRSRO Credit Ratings are assigned by an
entity that is not a NRSRO and, consequently, the rated obligation will not qualify for certain types of treatment under U.S. laws. MJKK and MSFJ are credit rating agencies registered
with the Japan Financial Services Agency and their registration numbers are FSA Commissioner (Ratings) No. 2 and 3 respectively.
MJKK or MSFJ (as applicable) hereby disclose that most issuers of debt securities (including corporate and municipal bonds, debentures, notes and commercial paper) and preferred
stock rated by MJKK or MSFJ (as applicable) have, prior to assignment of any rating, agreed to pay to MJKK or MSFJ (as applicable) for ratings opinions and services rendered by it fees
ranging from JPY125,000 to approximately JPY250,000,000.
MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER 1137353
Contacts CLIENT SERVICES
Richard Cantor +1.212.553.3628 Anne Van Praagh +1.212.553.3744 Americas 1-212-553-1653

Chief Credit Officer MD-Gbl Strategy &
Asia Pacific 852-3551-3077
richard.cantor@moodys.com Research
anne.vanpraagh@moodys.com Japan 81-3-5408-4100
Alastair Wilson +44.20.7772.1372 Marie Diron +65.6398.8310 EMEA 44-20-7772-5454
MD-Global Sovereign Risk MD-Sovereign Risk
alastair.wilson@moodys.com marie.diron@moodys.com
Yves Lemay +44.20.7772.5512 Colin Ellis +44.20.7772.1609
MD-Sovereign Risk MD-Credit Strategy
yves.lemay@moodys.com colin.ellis@moodys.com
Thorsten Nestmann +49.69.70730.943
VP-Sr Credit Officer/RPO
thorsten.nestmann@moodys.com

PBC 1137353 1

Uploaded by

Document Information

Original Title

Copyright

Available Formats

Share this document

Share or Embed Document

Sharing Options

Did you find this document useful?

Is this content inappropriate?

Copyright:

Available Formats

PBC 1137353 1

Uploaded by

Copyright:

Available Formats

SOVEREIGN AND SUPRANATIONAL

SECTOR IN-DEPTH Sovereign Defaults Series

How frequent are sovereign defaults on local currency debt?

Sample includes both rated and unrated issuers.

1975-1996, sample size: 23 1997-2018, sample size: 40

Why are sovereign defaults on local currency debt rising?

Sovereign local currency debt markets have deepened dramatically

Sovereign debt restructurings have become more comprehensive

Relative capacity to service foreign currency debt has improved as well

What are the causes of government defaults on local currency debt?

4. The high debt burden in local currency.

Economic stagnation and currency crises Banking crises Hyperinflation

High debt burden Political and institutional weaknesses

Jamaica (2010, 2013), Greece (Mar. 2012, Dec.

Source: Moody's Investors Service

Hyperinflationary pressures can also result in government default

Debt structure plays a role

Source: Moody's Investors Service

40 32.8 32.6 36.2

What is Moody's approach to assigning local vs foreign currency sovereign ratings?

Moody’s related publications

» Caribbean Sovereigns: The silent debt crisis, February 2016

» The evolution of emerging market sovereign debt, September 2015

» Sovereign defaults series – the aftermath of sovereign defaults, October 2013

» Sovereign defaults and interference: Perspective on government risks, August 2008

» Rating Methodology: Sovereign bond ratings, November 2018

» Sovereign Default Research

REPORT NUMBER 1137353

Contacts CLIENT SERVICES

Richard Cantor +1.212.553.3628 Anne Van Praagh +1.212.553.3744 Americas 1-212-553-1653

You might also like