Sovereign Default and its Impact on Indian Equity Markets

Debt default

Explore how the record sovereign default of several countries can impact the Indian markets.

In 2022, the people of Sri Lanka were compelled to take to the streets due to a dire combination of inflation, depletion of foreign exchange reserves, scarcity of medical supplies, and a sharp spike in the prices of essential goods. The government’s announcement in April 2022 that it could not meet its obligations on both domestic and foreign debt made Sri Lanka the first country in the Asia Pacific region to experience a sovereign default in the current century.

As we fast forward to 2023, the economic situation of Sri Lanka seems to have been replicated in two more countries, leading them to join the list of sovereign default countries. 

What’s Happening?

Moody’s recently released a report highlighting a concerning trend in the global economy. According to the report, the year 2022 witnessed the largest number of sovereign default cases since 1983, with seven countries experiencing such defaults. These nations include Mali (Caa2 stable), Russia (rating withdrawn), Sri Lanka (Ca stable), Belarus (Ca negative), El Salvador (Caa3 stable), Ukraine (Ca stable), and Ghana (Ca stable).

The report further notes that the annual sovereign bond default rate surged to nearly 5% in 2022, more than five times the average default rate observed from 1983 to 2022. Unfortunately, the situation seems to have worsened in 2023, with Argentina (Ca stable) and Mozambique (Caa2 positive) joining the list of nations experiencing sovereign default.

What is Sovereign Bond Default?

Sovereign default occurs when a government is unable to repay its foreign debt obligations. This can have severe consequences for the affected country, as it may find it challenging to regain access to debt markets. Foreign creditors can include governments, commercial banks, and international financial institutions.

Impact on Global Markets

According to a research report, there is a significant correlation between equity markets and sovereign bond defaults. The risk of sovereign default can have a negative impact on international equity markets, particularly during times of economic crisis.

That being said, the impact of these defaults on global bond or equity markets may be limited. According to the Economic Times, most of the countries experiencing default are small economies and may not have a significant impact on global markets. 

What’s in it for India?

India currently holds a BBB rating from S&P and Fitch, as well as a BAA3 rating from Moody’s, which is the lowest rating within the investment-grade category. These ratings indicate moderate credit risk with a stable outlook. However, India is seeking to improve its credit rating, as reported by The Economic Times.

The country is in a favourable position due to recent reforms in the banking and non-banking financial sector, with credit growth expected to reach 15% in FY2024. Compared to other emerging markets, India’s position is relatively stronger than China’s.

That’s it for today. We hope you’ve found this article informative. Remember to spread the word among your friends. Until we meet again, stay curious!

*The article is for information only. This is not investment advice.


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