Moody's: fasten your seat belts

Moody’s sovereign risk review is best described as sobering. There’s a risk of accelerating interest rate rises in 2010. There is also a risk of disorderly market conditions. We should limit our expectations on how much BRIC can help. And there is little comfort for Greece: euro membership may help with liquidity, but it is no protection against the risk of long-term insolvency. Key points below:

As the global economic recovery attains a more solid footing, 2010 will at best see a normalization and at worst a severe tightening in government financing conditions. Long-term interest rates may increase more rapidly than expected because of an over-reaction to economic news, which we believe will be mildly positive overall. Moreover, the slow unwinding of quantitative easing will accelerate this credit repricing process.The end of exceptionally low financing conditions will expose the true cost of the crisis on government debt affordability across the world.Aaa governments will probably not have the luxury of waiting for the recovery to be secured before announcing and perhaps also implementing credible fiscal consolidation programs.As most governments simply cannot afford another financial crisis, they will attempt to ring-fence their balance sheets from selected contingent liabilities. This could in some cases create disorderly market conditions.EMU membership will protect some countries against liquidity risk but not against long-term insolvency risk.Despite a slow process of global sovereign risk convergence – i.e. a narrowing of the ratings gap between rich and poorer G20 countries – BRIC countries are unlikely to replace the large Aaas’ role as anchors to the system any time soon.The crisis has once again revealed the dangers of financial globalization for emerging markets – namely, the upside of the recurrence of asset price inflation after the downside of precipitous outflows of capital. However, the arsenal of policy levers has not expanded.

Chart shows sovereign ratings that Moody’s have changed during 2009:

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