Alliant Emerging Markets announced the expansion of its risk analytics and advisory services by launching a source of political and economic risk indices and ratings available to banks, investments banks, private equity, F500 and hedge funds.
Alliant’s risk analytics began delivering the service through Bloomberg’s platform worldwide on July 22, 2008. Alliant’s services include political & economic risk indices and country ratings available to all Bloomberg users and a subscription service offering access to ratings and indices for seven categories of risks for each of Alliant’s 176 countries and territories.
“By combining our ratings and indices with the functions available on Bloomberg, we are bringing investors and risk managers the most comprehensive set of political and economic risk data in a format that is, for the first time, fully compatible with the way banks, hedge funds, and treasury officers look at risk and stress testing,” said John M. Minor, Alliant Emerging Markets’ executive vice president and managing director. “And by anchoring our analysis in actual data, loss history and the experience of our clients, as opposed to qualitative assessments or stock and bond markets levels, we are translating country risk for specific companies and focusing on actual losses facing investors.”
Rising Credit Risk in Russia & Eastern Europe
Eastern Europe led the increase with trade credit downgrades in Russia, Poland, and Slovakia over concerns of rising defaults on financial and corporate loans and the increased likelihood of a credit and counterparty risk liquidity crisis in these countries. Brazil and Argentina, on the other hand, have shown surprising resilience in the last six months, and saw their outlook changed from Negative to Stable, downplaying the risk of a credit, currency or debt crisis in Latin America.
Dr. Michel Léonard, Alliant Emerging Markets’ senior vice president and chief economist said: “In the last quarter of 2007, we were very concerned with the data and feedback coming out of Latin America and paid close attention to Brazil. These markets have shown surprising resilience. However, loan defaults on financial and corporate portfolios in Eastern Europe and Central Asia have continued to increase, pointing to Eastern European weakness. This is especially the case in countries such as Poland, where investors have been unwilling to fully price credit risk for some years now. Russia would be in a much worse position without oil and gas liquidity which, paradoxically, weakened sound risk management of corporate and financial lending in the country and increased credit and liquidity risk. U.S. and European banks and corporations lending to counterparties in those countries should accordingly adjust their assessment of local credit and counterparty risk.”
Broken Risk Models: Banking & Corporate Exposures
Alliant’s political and economic risk analytics and data reveal a higher than expected incidence of so-called “catastrophic risk events,” forecasting further credit losses in the U.S. and Europe throughout 2008 and rising credit losses in Emerging markets going into the first Quarter of 2009.
Dr. Michel Léonard, said: “Without getting too technical, most stress testing models use two standard deviations to define possible losses. Our data and experience with catastrophic risks indicate this underestimates financial losses. When modeling political risk, we are very aware of the statistical limits of our data. As risk managers, we need to remind ourselves of such limits, whether for currency, credit, counterparty exposures or, more recently, the sub-prime crisis.”
On risks facing investors in Emerging Markets, Dr. Léonard added: “As others have said, there is a false certainty that comes with the specificity of statistical analysis and one must confront the limits of models to prevent losses. Our data, models and experience indicate that the overall markets’ view of risks in Emerging Markets underestimates potential losses across markets and in Russia and Eastern Europe in particular. Given recent market events, few investors should still believe that there is such a thing as an asset class that is too resilient to burst.”