Moody’s new sovereign bonds scheme benefits RP

Moody’s Investors Service has raised its foreign currency ceilings for sovereign bonds, a move that the agency said resulted in upgraded ceiling for 70 countries including the Philippines.

Under the credit rating agency’s new methodology, Moody’s said the Philippines’ ceiling on long-term foreign currency bonds was raised to "Ba3" from "B1", while the negative outlook was maintained.

"Under our new country ceiling methodology, we no longer automatically assume that a foreign-currency bond default by a government would be accompanied by a foreign-currency payment moratorium affecting most issuers domiciled within its borders," said Moody’s in a statement.

Moody’s said the new methodology favored greater flexibility in the application of country ceilings which reflected the deepening of the international capital markets since the 1990s.

Moody’s said most governments have generally avoided a generalized moratorium in the face of a government foreign-currency bond default.

In assessing the probability of a moratorium in the event of an external payments crisis, Moody’s said it would look at the extent to which the local economy was integrated into the world economy, and the extent to which the government would perceive a moratorium as more costly than other policy alternatives.

Moody’s said it also weighed the likelihood of a government socializing the cost of a crisis.

"This takes place when the government substitutes its credit for the credit of the local companies, sparing domestic firms from the risk of having to face a court challenge abroad," said the credit rating agency.

As a result of the new methodology, Moody’s said the ceilings of the vast majority of countries rated by Moody’s have been upgraded by at least one notch. In some cases, such as the newer members of the European Union, the upgrades were four and five notches, bringing those countries into closer alignment with fellow EU members.

Countries that have the dollar as their legal currency and countries with foreign-currency bond ceilings already at their local-currency guidelines were not affected by the change in methodology because moratorium risk assessments do not change the risk profiles embedded in those existing ceilings.

Prompted by the revised ceilings, Moody’s said, the foreign-currency issuer ratings of non-government issuers may also be upgraded.