PBC 1362448

SOVEREIGN AND SUPRANATIONAL
SECTOR IN-DEPTH Financial Stability – Global

17 April 2023
Confidence-sensitive sovereigns are most
vulnerable to any widening in banking stress
Summary
TABLE OF CONTENTS The credit effects of recent bank stress in the United States (Aaa stable) and Switzerland
Summary 1
(Aaa stable) have been limited for sovereigns to date. However, some lower-rated sovereigns
Direct exposure to any potential
troubled banks varies 2 (typically rated B1 or below) are particularly vulnerable to downside scenarios in which access
Confidence-sensitive sovereigns to financing is more limited for an extended period of time. Moreover, in a severe downside,
are most vulnerable to financial the direct fiscal costs and spillover effects of bank stress to the wider economy would be
tightening and asset repricing 5
significant if governments needed to step in to rescue systemically important financial
Policy response to shocks informs
assessment of sovereign institutional institutions. Heightened or prolonged stress would also test the policy effectiveness of all
and governance strength 8 governments regardless of their underlying credit quality.
Appendix 9
» Sovereigns' direct exposure to any potential financial stress, particularly
emanating from troubled banks, varies. We have increased our assessment of
Contacts banking sector risk for the governments of Switzerland and the US in light of recent
Sarah Carlson, CFA +33.1.5330.3353 events. We are also closely monitoring risks in other countries, including pockets of
Senior Vice President risk not immediately visible in the systemic data. In our baseline, we do not expect
sarah.carlson@moodys.com
the crystallization of significant banking sector-related contingent liabilities. But past
Hatim Bukhari +44.20.3314.2414 experience shows that such costs, when they do materialize, tend to be large with
Associate Analyst
hatim.bukhari@moodys.com potentially significant credit and rating implications for sovereigns.
Alexis Corn +1.212.553.0269 » Confidence-sensitive sovereigns are vulnerable to financial tightening and asset
Associate Analyst
repricing. Sovereigns' exposure to liquidity and external risk is already reflected in our
alexis.corn@moodys.com
ratings, but we are watching for signs that readily available funding sources are unable to
Mauro Leos +1.212.553.1947
cover needs. Sovereigns with small domestic financial sectors and large foreign-currency
Associate Managing Director
mauro.leos@moodys.com obligations are particularly exposed to a period of heightened risk aversion. Non-bank
financial intermediaries (NBFIs), including the private credit markets, are a potential
Matt Robinson +44.20.7772.5635
Associate Managing Director amplifier and accelerant of these risks for sovereigns.
matt.robinson@moodys.com
» Our assessment of institutional and governance strength could weaken if policy
Dietmar Hornung +49.69.70730.790
Associate Managing Director
responses are ineffective or have credit-negative, long-term consequences. A
dietmar.hornung@moodys.com quick and predictable response to banking sector stress is of fundamental importance to
Gene Fang +65.6398.8311
a sovereign's credit profile. However, the longer-term consequences of a crisis response
Associate Managing Director are also vitally important. The highest-rated sovereigns often must contend with
gene.fang@moodys.com highly complex interrelationships in the financial sector that make calibrating proactive
Marie Diron +44.20.7772.1968 policy measures difficult and raise the risk that policy missteps could result in a further
MD-Global Sovereign Risk deterioration of credit conditions.
marie.diron@moodys.com
MOODY'S INVESTORS SERVICE SOVEREIGN AND SUPRANATIONAL
Direct exposure to any potential troubled banks varies

Actions that the US and Swiss authorities took in response to stress at several banks last month prevented a crisis of confidence in the
banking sector and limited economic disruptions. (See reports on interventions by US and Swiss authorities.) However, if stress were to
increase and spread beyond the banking sector, we believe it would likely do so through three transmission channels (Exhibit 1). We are
monitoring for signs that any of these risks are increasing for sovereigns.
Exhibit 1
Bank stress transmission channels for sovereigns
Source: Moody's Investors Service
Systemwide bank assessments can miss pockets of risk

Severe bank stress can cause credit retrenchment and often lead to sharp growth slowdowns, affecting the sovereign’s revenue base
and leading to a buildup in public debt. Bank debt restructuring can increase the risk of old and new contingent liabilities crystallizing
on the government’s balance sheet in case of a bailout. These events are a test of a sovereign's institutions, particularly the quality of
its regulatory framework and supervision. For confidence-sensitive sovereigns, these periods can also increase their vulnerability to
government liquidity risk and external vulnerability risk.
Bank stress is an important driver of sovereign default. In our study on the causes of sovereign defaults, which covers 42 sovereign
bond defaults from 1997 to July 2020, the number of defaults caused by banking crises had decreased in the preceding decade, while
those resulting from institutional weaknesses and high debt burdens had increased. Nevertheless, 14% of sovereign defaults were
identified as being caused by banking crises. In other cases, bank recapitalization costs contributed to a large and sudden buildup of
public debt in the aftermath of banking crises, which in turn increased debt servicing costs, triggered capital outflows, and resulted in
foreign-exchange crises. Six defaults fell into this category, including Ecuador in 1999 and Cyprus in 2013. Another eight defaults also
eventually culminated into banking crises, meaning that banking crises accompanied 33% of all defaults in the study.
This publication does not announce a credit rating action. For any credit ratings referenced in this publication, please see the issuer/deal page on https://ratings.moodys.com for the
most updated credit rating action information and rating history.
2 17 April 2023 Financial Stability – Global: Confidence-sensitive sovereigns are most vulnerable to any widening in banking stress
When assessing a sovereign's credit profile, we take into account the risk of a systemic crisis in the banking sector and the impact it
may have on a country’s economy, institutions and public finances. As a starting point to our assessment of this risk, we consider the
average credit strength of the banking system and the size of the domestic banking system in relation to the size of the economy. The
weaker and larger the banking system, the greater the potential for contingent liabilities to crystallize on the government’s balance
sheet and for banking stress to spill over and affect the functioning of the economy. But using solely systemwide assessments can
obscure pockets of risk.
Concentration risk. When one or a small number of banks account for a very large share of the sector, or are particularly large in
relation to the size of the economy, we typically consider banking sector risk to be greater than a systemwide assessment indicates.
Most recently, in Switzerland, after UBS Group AG (UBS, A3 negative) 1 announced its plan to acquire Credit Suisse Group AG (CS, Baa2
review for upgrade), we adjusted up our assessment of banking sector risk by one notch from “a” to “baa” for the sovereign to reflect
the size of the new combined entity (with assets over 200% of GDP), which increases concentration risk in the Swiss banking system.
We have also reflected concentration risk in our banking sector risk assessments of some other countries, such as Ireland (A1 positive)
and Malta (A2 stable).
Business-model risk. We also look for pockets of risk posed by banks with business models that, for example, may heighten their
exposure to liquidity stress. This is the case in the US, which has a highly diverse banking sector, encompassing everything from large
banks such as Bank of America Corporation (BAC, A2 review for upgrade), Citigroup Inc. (A3 stable), JPMorgan Chase & Co. (JPM, A1
stable) and Wells Fargo & Company (A1 stable), to several thousand very small community banks. This diversity means that, without
further scrutiny, the average financial strength assessment can obscure pockets of higher risk for the sovereign.
The rapid deterioration in the operating environment for US regional banks in March 2023 prompted a one-notch adjustment of our
assessment of US banking sector risk from “a” to “baa” for the sovereign. (Our banking sector outlook for the US is also negative.)
While events thus far have had the largest effect on mid-sized banks, recent data indicate funding strains for the banking system as
a whole and a net outflow of deposits from the US banking system, including foreign branches and agencies, to mutual funds. At this
stage, we have not identified other systems in which business-model risk would support an adjustment of our assessment of banking
sector risk for the sovereign.
Providing liquidity through central banks and robust deposit insurance schemes can limit sovereigns' contingent liabilities
We do not expect significant contingent liabilities for Switzerland and the US from the recent banking stress largely because authorities
have provided liquidity to the banking system through their respective central banks and deposit insurers; this liquidity support has not
affected the sovereigns' balance sheets. Should bank stress affect other countries directly, sovereigns with similarly effective liquidity
support tools would likely be able to mitigate the risks to their balance sheets. For sovereigns with less effective monetary policy, banks'
liquidity strains could quickly escalate to solvency issues with material credit implications for the sovereign.
Central bank facilities. In response to recent banking sector stress in the US, the Federal Reserve rolled out a new facility, the
Bank Term Funding Program (BTFP), which aims to prevent the sale of securities at a loss to meet unexpectedly pronounced deposit
drawdowns and therefore limit the risk of contagion. The BTFP does not have a direct fiscal impact, other than a small contingent
liability created by the $25 billion (around 0.10% of 2022E GDP) backstop from the US Treasury’s Exchange Stabilization Fund. Under
our baseline case, we do not expect the backstop to be used.
In Switzerland, the Swiss National Bank's (SNB) provision of liquidity to Credit Suisse included CHF100 billion (13% of 2022 GDP)
backed by a federal default guarantee. In addition, the federal government decided to provide UBS with a loss protection guarantee of
CHF9 billion (1.2% of 2022 GDP). While these measures have increased the government's contingent liabilities, we do not expect these
costs to materialize in our baseline. Moreover, a significant degree of shock-absorption capacity in the government's balance sheet
means that Switzerland's fiscal strength will remain robust unless there is a systemwide financial crisis that the central bank could not
stabilize.
The American and Swiss examples are typical. Where difficulties in the banking system are related to liquidity issues in otherwise
solvent institutions, central banks' lender of last resort functions are a critical institutional feature to prevent liquidity stress from
developing into solvency problems (through forced asset disposals at fire-sale prices) that can have high direct and indirect costs to
the sovereign. In the midst of stressed conditions, solvency problems that entail a direct fiscal cost for governments can still emerge in
spite of ample liquidity support. However, a strong central banking setup that allows for rapid lending against collateral in a liquidity
crisis helps to shield the government's balance sheet and the macroeconomy from banking sector distress.
Deposit insurance. In the event that a bank runs into solvency issues despite central bank liquidity support, deposit insurance
schemes are instrumental in limiting a sovereign's exposure. Indeed, as is routine in the US, recent bank resolutions have been
undertaken through the Federal Deposit Insurance Corporation (FDIC), which does not receive congressional appropriations and is
isolated from the government balance sheet. Even where the US Treasury, Federal Reserve and FDIC have recently invoked the systemic
risk exception to increase depositor protections for individual institutions (such as Silicon Valley Bank), contingent liabilities to the
US did not increase. That is because, under this exception, the banking sector – not the US government – pays to replenish the FDIC's
Deposit Insurance Fund.
Broadly speaking, we look at the credibility of these schemes in mitigating the risks of systemwide bank runs when a shock occurs.
This assessment can be based on the level of protection, the transparency of conditions under which depositor protection is offered,
and the ability of the insurer to deliver on promises of depositor protection (which can sometimes cover foreign-currency deposits).
Some deposit insurers are private (usually owned by a consortium of banks), while others are public. However, even where there is legal
separation from the sovereign, in most cases the governments tend to step in to prioritize and protect depositors if the insurance fund's
resources were depleted and the government had the capacity to do so, in order to preserve financial stability.
Yet not all countries offer a deposit insurance scheme. The International Association of Deposit Insurers has only 94 members, and lack
of deposit insurance is not just a feature of frontier-market economies. In fact, within the OECD, two countries – Israel (A1 stable) and
New Zealand (Aaa stable) – do not have deposit insurance schemes, though New Zealand is in the process of passing legislation that
would establish such a scheme.
If increased banking stress requires sovereigns to step in and provide systemic support, the direct fiscal costs are usually
large
Solvency problems in systemically important banks can result in sovereign intervention through recapitalization or government
guarantees on bank liabilities, all of which increase actual or contingent liabilities for the sovereign.2 In cases of recapitalization, the
direct costs can be very large, with some of the more severe cases during the global financial crisis and ensuing European sovereign
debt crisis exceeding 30% of GDP. Taking into account the economic turmoil that typically accompanies bank rescues, the total costs
to the sovereigns are generally much larger, with significant credit and potential rating implications. For example, during Ireland's
banking crisis, its government debt increased from 24% of GDP in 2007 to 120% in 2013, while the sovereign rating fell from Aaa to
Ba1.
Bailouts. Resolutions of large, systemically important institutions will often have direct fiscal costs for governments that result in
significant ownership stakes of banks for many years. For instance, the Netherlands (Aaa stable) still owns a large share (just under
50%) of ABN Amro Bank N.V. (A1 stable) following the nationalization of the bank in 2008.
Over time, the cost of these bailouts can sometimes be more than counterbalanced – in nominal terms, though sometimes not on
a net present value basis using a market (or fair) value approach – by the sale of stakes in financial institutions. For example, the US
government made a nominal profit of more than $12 billion on its bailout of Citigroup when it exited its stake in 2010. And it earned a
nominal profit of $109 billion on its bailout of the financial system during the global financial crisis, including the Troubled Asset Relief
Program (TARP) and the bailout of federal housing finance agencies Fannie Mae and Freddie Mac, according to ProPublica's Bailout
Tracker.
However, these actions are clearly not always profitable – and are generally not designed to be. According to the United Kingdom's
(UK, Aa3 negative) Office of Budget Responsibility (OBR), the government had recovered its cash outlays to the financial sector during
the global financial crisis (which totaled £136.7 billion) by January 2023 and would make an overall profit of £15.6 billion if it sold off
its remaining stakes. Yet taking into account the cost of financing these interventions, the OBR estimates the overall net cost to the
government would have amounted to £33.2 billion.
Exhibit 2
Banking crises incur significant costs for sovereigns globally
Direct fiscal costs related to restructuring of the financial sector, % of GDP
60
50
40
30
20
10
0
1974
1980
1981
1982
1983
1989
1990
1991
1992
1998
1999
2000
2001
2007
2008
2009
2015
2016
1975
1976
1977
1978
1979
1984
1985
1986
1987
1988
1993
1994
1995
1996
1997
2002
2003
2004
2005
2006
2010
2011
2012
2013
2014
Sources: Laeven, Luc, and Fabian Valencia, “Systemic Banking Crises Revisited” IMF Working Paper No. 2018/206 (September 2018) and Moody's Investors Service
Bail-ins. Bail-in regimes can reduce the impact of bank failures on governments' balance sheets, although they do not eliminate it.
Even sovereigns that have a bail-in regime (i.e., where shareholders, creditors and uninsured depositors absorb losses to recapitalize a
bank) are likely to use their balance sheets to support financial institutions if the banking shock risks becoming systemic. In the EU, the
passage of the Bank Resolution and Recovery Directive (BRRD) in 2014 did not result in changes to our assessment of EU countries'
banking sector risk.
However, bail-in regimes are far from universal. They tend to be more prevalent in advanced economies, though some emerging
markets (such as Mexico (Baa2 stable)) have also adopted bail-in laws. G-20 countries agreed with the Financial Stability Board (FSB)
international standards for resolution regimes, though these vary considerably. In Asia, most G-20 countries have not adopted bail-in
regimes. In Japan (A1 stable), the government continues to make budgetary allocations to provide capital for solvent banks in an effort
to prevent conditions that would trigger bail-in, although the fiscal burden for the sovereign is not significant. Before the pandemic,
India (Baa3 stable) also provided budgetary support for state-owned banks, which were challenged by weak solvency levels. While bail-
in regimes are not a panacea that eliminates direct fiscal risks for sovereigns, all else being equal, the absence of these arrangements
increases costs for sovereigns.
Capacity and willingness to support varies enormously. Besides differences in banking crisis management regimes, some
sovereigns have more fiscal capacity to support their banking systems than others. Especially for lower-rated sovereigns, a highly
leveraged and fiscally weaker government may lack the capacity to support the banking system, even if it is willing to provide such
support because a bank failure may result in significant consequences for the sovereign and the overall economy. These capacity
constraints can encourage sovereigns to rely on liquidity assistance for longer and beyond the point at which the policy is effective,
exacerbating the ultimate fiscal costs of the banking crisis.
The lack of fiscal capacity is a clear impediment to the government's ability to manage a broader confidence shock. These limitations
are exacerbated in countries that lack a lender of last resort to address temporary liquidity issues or a bank resolution framework to
address a bank failure. In these cases, the lack of government institutional capacity and frameworks could accelerate a crisis.
Confidence-sensitive sovereigns are most vulnerable to financial tightening and asset repricing
Access to funding is particularly sensitive to fluctuations in market confidence for some sovereigns, especially those with weaker credit
and institutional strength. (See appendix for detail on factor and subfactor scores for such sovereigns.) We already capture exposure to
liquidity and external vulnerability risks in sovereigns' credit profiles, although we are monitoring for signs of sizeable funding needs not
covered by readily available funding sources.
Small domestic financial sectors, large foreign-currency obligations amplify stress when risk aversion rises
Even before the recent stresses in the banking system, we considered frontier-market sovereigns with large foreign-currency debt
obligations to be at risk of liquidity strains because they are subject to comparatively tight financing conditions. These difficulties can
be amplified when risk aversion is heightened and market conditions are tight, and so some of these countries face difficulties rolling
over maturing debt. They are more exposed to confidence-sensitive funding because their domestic financial sectors are relatively small
given low incomes and savings rates.
As a result, frontier-market governments tend to have large external, foreign-currency debts (often contracted when funding conditions
were more favorable), which, for some, are coming due in the next few years. In a worst-case scenario in which they are unable to
generate enough financing externally, governments can borrow domestically in local currency and access hard currency from the
central bank. However, this puts pressure on the central bank’s foreign-exchange reserves.
Frontier-market governments are also less able to reduce their borrowing needs because of their weak revenue generation and
constraints on spending amid strong social demands and already-high interest burdens. Weak economic growth tied to high inflation
from a supply shock, rising borrowing costs and slim savings will likely intensify these fiscal pressures.
In addition to the impact on sovereigns with large external obligations, an increase in global risk aversion will also likely restrict access
to foreign currency for the banking sector and corporates in frontier-market economies, as external investors pull back and central
banks try to defend their currency reserves. In Egypt (B3 stable), banks have already faced foreign-currency liquidity issues even before
recent stresses in the US and Swiss banking systems. In 2022, Egypt's banking system reported a large increase in its net foreign
liabilities due to the broader countrywide squeeze in foreign currency. As a result, the banking system recorded both a drawdown of
its foreign-currency liquidity and increased reliance on short-term dollar market funding. In countries such as Nigeria (Caa1 stable),
commercial banks have lent substantial amounts of foreign currency to the central bank; these loan proceeds form part of the central
bank's foreign-currency reserves.
These two banking systems are experiencing foreign currency liquidity pressures due to their exposure to global monetary tightening
and heightened risk aversion, but the risk of large customer deposit withdrawals and/or crystallization of bond losses is low given their
stable deposit bases and solid local-currency liquidity. Many such economies have access to funding from the World Bank, International
Monetary Fund or multilateral development banks. But in a period of rising risk-off behavior with tighter financial conditions, stresses
can – and will – emerge (Exhibit 3).
Exhibit 3
Many lower-rated sovereigns have high government financing needs and face heightened external liquidity risk
Government borrowing requirement, foreign currency debt and central bank foreign exchange reserves, % of GDP
20
Central Bank Foreign Currency Reserves/GDP
Tunisia
Ukraine
Uzbekistan Mozambique
15
Rwanda
Costa Rica Maldives Mongolia
(2022)
El Salvador
10
Ghana
Kenya
Egypt
Zambia Bahrain
Government Borrowing
5 Republic of the Congo Requirement/GDP (2023F):
10% 20% 30%
Pakistan Mali Sri Lanka
Senegal
0
0 10 20 30 40 50 60 70 80 90 100
Government Foreign Currency Debt/GDP (2022)
Sources: Haver Analytics and Moody's Investors Service
Risk aversion leads to tighter credit conditions, which slows economic growth
Increased risk aversion also tends to dampen economic growth because banks are likely to take a more cautious stance and tighten
lending. In our baseline scenario we already assume that bank credit will generally remain tight. At this stage, we have not revised our
growth projections because of bank stress. However, in case of more severe bank stress, bank credit could tighten materially further,
causing economic growth to slow.
The economic implications of tighter credit conditions vary. In particular, economic dependence on bank lending varies. For instance, in
Europe and Asia, banks are more central to the provision of credit to the overall economy than they are in the US (Exhibit 4). Therefore,
all else being equal, the European and Asian economic cycles are more vulnerable to this source of stress.
Exhibit 4
Some countries are more reliant on banking sector credit
Banking institutions' claims on private sector and central government in G-20 economies, % of GDP
Private Sector Central Government*

250
200
150
100
50
0
China Korea Japan United Australia France Brazil Italy Euro Area Turkiye Germany Saudi South India United Mexico Indonesia Argentina
Kingdom Arabia Africa States
*Saudi Arabia data includes claims on quasi-government institutions. UK claims on central government are on a net basis. Argentina data is based on reported credit to public sector.
Comparable data for Canada is not available.
Sources: IMF International Financial Statistics, Ministerio de Hacienda Argentina, Saudi Central Bank and Moody's Investors Service
Non-bank financial intermediaries can increase risk aversion and amplify sovereign credit stress
Should any financial crisis situation accelerate, this could have more structural implications for sovereigns' economic and fiscal
strength. Another possible amplifier and accelerant of these risks for sovereigns are NBFIs, or shadow banks. NBFIs have also been cited
by international observers, including the International Monetary Fund (IMF), Bank for International Settlements (BIS) and European
Central Bank (ECB), as a key source of risk for the global financial system. For example, in a December 2022 report, the BIS pointed
to risks from non-US NFBIs' $26 trillion of dollar obligations in the form of currency forwards and swaps. Although the aggregate
volume of global NBFIs now exceeds global bank assets, NBFIs are not as tightly regulated as banks with respect to capital and liquidity
requirements, nor do they benefit directly from any central bank liquidity backstop in case of a spike in redemption demands.
The lack of a systemic liquidity backstop incentivizes NBFIs to behave in a pro-cyclical way during times of tightening financial
conditions, thereby exacerbating systemic liquidity withdrawal. Examples include open-ended bond funds, which promise to fully
repay clients on demand and were forced to sell their securities at fire-sale prices to meet redemptions at the start of the pandemic.
Another example is in the UK pension fund sector, where in September 2022 some funds were forced to sell long-dated gilts to meet
margin calls related to yield-sensitive derivatives exposures. In both instances, central banks were ultimately forced to step in to avoid
contagion to the banking system. The collapse of the crypto asset sphere in decentralized finance follows the same dynamic although
the volume and interconnectedness of the sector with the real economy does not appear systemic for now.
In most cases, the crystallization of risks in NBFIs does not entail direct fiscal risks for sovereigns, though central banks may have had
to step in to stabilize markets. These risks can have knock-on effects onto the broader economy though. For example, the 2018 default
in India's Infrastructure Leasing and Financial Services gave way to a period of tighter credit conditions that undermined the country's
growth performance. However, in extreme scenarios, the crystallization of risks in NBFIs can create direct fiscal costs to sovereigns. The
bailout of the American International Group, Inc. (AIG, Baa2 stable) during the global financial crisis in 2008 remains the most notable
example of how non-bank shadow banking activities can directly affect the sovereign balance sheet. The corporation had grown to
systemic proportions as a key counterparty in off-balance-sheet derivatives markets, requiring a bailout to stave off a breakdown in the
functioning of these markets.
Within the broader NBFI sector, the private credit (PC) markets have come into focus as an area that could potentially amplify financial
risks. While there is a lack of data on the growth and composition of PC markets, they appear to have been relatively resilient over the
course of 2022 despite high inflation, rising interest rates, and tightening public debt market credit conditions. However, this resilience
will be tested further in 2023 as already-tight financial conditions tighten further, alongside the rising risks of spillovers from banking
stress and an anticipated economic downturn.3
Policy response to shocks informs assessment of sovereign institutional and governance strength
The strength of institutions and governance is of fundamental importance to a sovereign's credit profile. Sovereigns with strong
institutional capacity and governance tend to have high regulatory quality, indicating a sound and well-governed banking sector that
is more resilient to shocks. Conversely, weaknesses in governance and regulatory oversight at the sovereign level can increase both the
probability and impact of banking crises and make crisis management less effective.
During periods of financial stress, strong institutions can be of paramount importance to limiting the impact of higher banking sector
risks on a sovereign's credit profile. Even countries with the very strongest institutions can experience banks failures, but some of these
events will test the quality and effectiveness of institutions. As such, in addition to assessing sovereign institutions’ ability to prevent
shocks, we also assess their ability to respond effectively to shocks. For the strongest sovereigns, the response tends to be swift and
predictable. Even though authorities may need to adapt their crisis-management toolkit with no notice, the decisions they take are
unlikely to unintentionally create broader systemic risks.
For example, the speed of the policy response seen so far is consistent with our assessment of strong institutions in Switzerland and
the US, which equip policymakers with a range of tools aimed at shoring up confidence and containing contagion. In Switzerland,
the decisive and coordinated response of the federal government, the Swiss Financial Market Supervisory Authority (FINMA) and the
SNB was consistent with our view of Switzerland's significant institutional strength and gives us confidence that authorities will take
future action to maintain domestic financial stability if necessary. The rescue and related liquidity measures protected senior bank
creditors. However, the Swiss authorities' decision to fully write down Credit Suisse's Additional Tier 1 (AT1) bonds before full utilization
of shareholders' equity was unexpected. In the US, the Treasury, the Federal Reserve and Federal Deposit Insurance Corporation's
swift and coordinated actions thus far in response to banking sector stress are also consistent with our assessment of highly effective
monetary and macroeconomic policymaking.
We are unlikely to change our assessment in response to single policy decisions taken in the midst of a crisis. Rather, over time,
our assessment of the strength of a sovereign's institutions and governance will be informed not only by the speed and immediate
effectiveness of the response but also by the longer-term consequences of the decisions and response to shore up weaknesses in
institutional frameworks that have been revealed by banking sector stress. Moreover, in the US, policy effectiveness will also be tested
by the dilemma policymakers face as they try to address both inflation and financial stability risks. That is, a tight monetary policy
stance intended to anchor inflation expectations and price stability can further exacerbate banks' asset-liability mismatches and spur
financial stability risks.
More broadly, highly rated sovereigns must often contend with highly complex interrelationships in their financial sector, parts of which
can be lightly regulated and opaque, with risks not easily quantified. This makes calibrating proactive policy measures difficult and
raises the risk that policy missteps could result in further deterioration of the credit environment. In a downside scenario of prolonged
strains in the financial sector of a given sovereign, we may reassess the quality of supervision and regulation of the financial sector in
that country, which forms part of our assessment of monetary and macroeconomic policy effectiveness.
Appendix
Exhibit 5
Sovereigns rated B1 or below with Institutional and Governance Strength (F2) scores of “ba1” or below
Our assessment of banking sector risk, government liquidity risk and external vulnerability risk for these sovereigns
FC rating Outlook F2 score Banking sector risk Government liquidity risk External vulnerability risk
Albania B1 STA ba2 ba ba baa
Angola B3 POS b3 ba ba ba
Argentina Ca STA caa2 baa ca caa
Bahrain B2 STA ba2 b b b
Barbados Caa1 STA ba2 ba b b
Belarus Ca NEG ca b ca caa
Belize Caa2 STA b3 ba caa ba
Benin B1 STA ba3 baa baa a
Bolivia Caa1 RUR caa1 ba ba caa
Bosnia and Herzegovina B3 STA caa1 ba ba ba
Cambodia B2 NEG b3 ba baa b
Cameroon B2 STA caa1 baa ba a
Costa Rica B2 STA ba2 baa ba baa
Cuba Ca STA caa2 ba b caa
Democratic Republic of the Congo B3 STA caa2 ba ba baa
Ecuador Caa3 STA caa2 ba ca caa
Egypt B3 STA b1 ba ba b
El Salvador Caa3 STA caa3 ba caa baa
Ethiopia Caa2 NEG b3 ba caa b
Fiji B1 STA ba1 baa baa a
Gabon Caa1 STA caa3 ba ba baa
Ghana Ca STA caa2 ba ca caa
Honduras B1 STA b2 ba baa baa
Iraq Caa1 STA caa3 b b ba
Jamaica B2 STA ba1 baa baa a
Kenya B2 NEG b1 baa ba ba
Kyrgyz Republic B3 NEG b3 baa ba ba
Laos Caa3 STA caa2 ba b b
Lebanon C NOO ca ca ca ca
Maldives Caa1 STA b3 ba b ba
Mali Caa2 STA caa3 ba b baa
Moldova B3 NEG caa1 baa baa baa
Mongolia B3 STA b3 b b b
Mozambique Caa2 POS ca ba caa caa
Namibia B1 STA ba1 baa ba baa
Nicaragua B3 STA b3 baa ba ba
Niger B3 STA b3 baa ba baa
Nigeria Caa1 STA caa3 baa b ba
Pakistan Caa3 STA b3 b caa caa
Papua New Guinea B2 STA b3 baa ba baa
Republic of the Congo Caa2 STA ca ba b baa
Rwanda B2 NEG ba1 baa ba ba
Senegal Ba3 STA ba2 baa baa a
Solomon Islands Caa1 STA b3 baa ba baa
Sri Lanka Ca STA caa1 ba caa caa
St. Vincent and the Grenadines B3 STA ba3 ba baa ba
Suriname Caa3 STA ca ba ca b
Tajikistan B3 NEG b3 ba ba ba
Tanzania B2 POS b2 baa baa ba
Togo B3 STA b3 baa ba a
Tunisia Caa2 NEG b2 ba caa b
Turkiye B3 STA caa2 ba ba b
Uganda B2 NEG b3 baa ba ba
Ukraine Ca STA caa1 b caa caa
Zambia Ca STA caa3 ba ca ca
eSwatini B3 STA caa1 baa ba baa
Colors reflect assigned risk assessment scores, ranging from red (high risk) to dark green (low risk).
Source: Moody's Investors Service
Endnotes
1 The bank ratings shown in this report are the bank's or the banking group's senior unsecured debt rating and outlook.
2 We also systematically stress test more than 80 banking systems globally, which helps inform our analytical judgment. For more details, see Stress
Testing Banks: A Globally Comparable Approach.
3 See How risks in private credit could evolve as financial conditions tighten for a wider discussion of how risks associated with private credit could affect
broader financial markets, and key trends to watch.
© 2023 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 CREDIT RATINGS AFFILIATES ARE THEIR CURRENT OPINIONS OF THE RELATIVE FUTURE CREDIT RISK OF ENTITIES, CREDIT
COMMITMENTS, OR DEBT OR DEBT-LIKE SECURITIES, AND MATERIALS, PRODUCTS, SERVICES AND INFORMATION PUBLISHED BY MOODY’S (COLLECTIVELY,
“PUBLICATIONS”) MAY INCLUDE SUCH CURRENT OPINIONS. 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 APPLICABLE MOODY’S
RATING SYMBOLS AND DEFINITIONS PUBLICATION FOR INFORMATION ON THE TYPES OF CONTRACTUAL FINANCIAL OBLIGATIONS ADDRESSED BY MOODY’S
CREDIT RATINGS. CREDIT RATINGS DO NOT ADDRESS ANY OTHER RISK, INCLUDING BUT NOT LIMITED TO: LIQUIDITY RISK, MARKET VALUE RISK, OR PRICE
VOLATILITY. CREDIT RATINGS, NON-CREDIT ASSESSMENTS (“ASSESSMENTS”), AND OTHER 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. AND/OR ITS AFFILIATES. MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER
OPINIONS AND PUBLICATIONS DO NOT CONSTITUTE OR PROVIDE INVESTMENT OR FINANCIAL ADVICE, AND MOODY’S CREDIT RATINGS, ASSESSMENTS, OTHER
OPINIONS AND PUBLICATIONS ARE NOT AND DO NOT PROVIDE RECOMMENDATIONS TO PURCHASE, SELL, OR HOLD PARTICULAR SECURITIES. MOODY’S CREDIT
RATINGS, ASSESSMENTS, OTHER OPINIONS AND PUBLICATIONS DO NOT COMMENT ON THE SUITABILITY OF AN INVESTMENT FOR ANY PARTICULAR INVESTOR.
MOODY’S ISSUES ITS CREDIT RATINGS, ASSESSMENTS AND OTHER OPINIONS AND PUBLISHES ITS 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, ASSESSMENTS, OTHER OPINIONS, AND 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, ASSESSMENTS, OTHER OPINIONS OR PUBLICATIONS WHEN MAKING
AN INVESTMENT DECISION. IF IN DOUBT YOU SHOULD CONTACT YOUR FINANCIAL OR OTHER PROFESSIONAL ADVISER.
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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
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DEFINED FOR REGULATORY PURPOSES AND MUST NOT BE USED IN ANY WAY THAT COULD RESULT IN THEM BEING CONSIDERED A BENCHMARK.
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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
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MOODY’S is not an auditor and cannot in every instance independently verify or validate information received in the credit rating process or in preparing its Publications.
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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
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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
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— Charter Documents - 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
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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
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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
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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
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MJKK and MSFJ also maintain policies and procedures to address Japanese regulatory requirements.
REPORT NUMBER 1362448
Contacts
Anne Van Praagh +1.212.553.3744

MD-Gbl Sovereign Risk
anne.vanpraagh@moodys.com

PBC 1362448

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SOVEREIGN AND SUPRANATIONAL

SECTOR IN-DEPTH Financial Stability – Global

Direct exposure to any potential troubled banks varies

Source: Moody's Investors Service

Systemwide bank assessments can miss pockets of risk

Sources: Haver Analytics and Moody's Investors Service

Private Sector Central Government*

REPORT NUMBER 1362448

Anne Van Praagh +1.212.553.3744

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