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JPMorgan, Morgan Stanley guess on Colombia sinking additional into junk after S&P transfer By Reuters 


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© Reuters. FILE PHOTO: A JPMorgan brand is seen in New York Metropolis, U.S., January 10, 2017. REUTERS/Stephanie Keith/File Photograph/File Photograph

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LONDON (Reuters) – Wall Road banks JPMorgan (NYSE:) and Morgan Stanley (NYSE:) predicted on Thursday that Fitch would downgrade Colombia’s credit standing to junk earlier than the yr is out and spark compelled promoting after the same transfer by S&P World (NYSE:) Scores on Wednesday.

Colombia has come into focus after President Ivan Duque was compelled to withdraw a tax reform proposal seen as vital for fiscal stability in early Might amid staunch opposition from lawmakers and lethal avenue protests.

On Wednesday, S&P World Scores lowered its long-term international foreign money score on Colombia to BB-plus from BBB-minus, predicting that fiscal adjustment will likely be extra protracted and gradual than beforehand anticipated.

“It’s extremely possible that Fitch will select to hitch them as soon as the destiny of the fiscal bundle is clarified, most likely in 3Q, changing into the second company to charge Colombia sub-investment grade,” JPMorgan’s Katherine Marney wrote in a word to shoppers.

Scores company Fitch charges the South American nation on the lowest funding grade rank, with a unfavourable outlook, whereas for Moody’s (NYSE:) it’s two notches above “junk.”

“Actual timing is troublesome, with the underside line as a substitute being that we predict the downgrade is coming shut sufficient for markets to commerce on it,” mentioned Morgan Stanley’s Simon Weaver, who additionally predicts that Fitch will change into the second scores company to slash Colombia to junk.

In Might, JPMorgan calculated that Colombia may endure outflows of greater than $11 billion from its fastened revenue markets upon dropping its funding grade scores. This would come with $3.2 billion out of its hard-currency sovereign bonds, $3.5 billion out of native sovereign treasury bonds in addition to $4.7 billion of potential outflows from funding grade corporates.

Morgan Stanley mentioned the influence of a possible full downgrade to excessive yield for Colombia was not but within the value, though it mentioned there may very well be potential compelled promoting of as a lot as $5.1 billion.

“One other 50 foundation level widening would at the very least carry Colombia nearer to the extent the place different downgraded credit ended up buying and selling six months after being downgraded, that means round 240 bps for 10-year spreads,” Weaver mentioned.

Funding grade scores from a number of companies are a situation for inclusion of bonds in lots of key indexes whereas junk scores preclude some buyers from placing cash to work in a rustic, with downgrades resulting in compelled promoting particularly amongst index monitoring buyers.

Morgan Stanley’s Weaver additionally mentioned the scores motion may immediate the central financial institution, which stored an in depth eye on monetary stability concerns and connected ahead steering to fiscal considerations, to hike charges earlier than October, which was his earlier estimate.

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