Moody's may include risk of moratorium in foreign currency country ceilings

By Reshmi Basu

New York, Nov. 15 - Moody's Investors Services is asking for market comments on a proposal to incorporate the risk of a moratorium on external payments when it assigns foreign currency country ceilings.

This marks a different approach from the current ceiling policy, which assumes that a foreign currency government bond default would definitely be accompanied by such a payment freeze.

The proposed policy change accounts for changing government responses to defaults, Moody's said. There is no longer an assumption of a moratorium on payments.

If the proposal were implemented, a number of countries would see higher foreign currency country ceilings.

The new approach would better reflect general foreign currency transfer risk - what is meant by the concept of a ceiling, Moody's said in a statement.

Since the 1990s, governments facing external payment problems have taken measures to avoid a generalized moratorium, which has allowed Moody's to be more flexible in applying country ceilings.

The government foreign currency bond rating would no longer be seen as a cap for foreign currency ratings within a country. Instead the country ceiling would be defined "by the joint probability that a government would resort to a moratorium in the event of a default on foreign currency debt," wrote Moody's.

"Under the proposed policy change, a number of country ceilings will likely rise," said Vincent Truglia, managing director of Moody's sovereign risk unit.

"Although existing foreign currency ratings which pierce the country ceiling would probably not change, a number of issuer ratings and ratings on securities sold under domestic law might rise."

Moody's asks that comments be sent on or before Dec. 15 to cpc@moodys.com.

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