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Scope Ratings refines sovereign methodology to sharpen its fundamentals-based approach

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Scope Ratings refines sovereign methodology to sharpen its fundamentals-based approach

Scope’s approach distinguishes itself from the US rating agencies in the fundamental starting-point and communication of the sovereign analysis, the rating levels, the volatility of change in those levels as well as the main rating drivers.

“Scope has updated its methodology to sharpen its analytical edge, provide investors with greater insight on the credit risk captured by key criteria and provide even greater transparency for its analytical approach,” says Giacomo Barisone, Head of Public Finance at Scope.

The refinements add value in many ways by providing a better assessment and explanation of the risks captured by the key criteria, which itself, remain unchanged, says Barisone.
• Inflation: Scope has adjusted the inflation rate calculation to better account for the risk of long periods of high inflation as well as sustained periods of low inflation or deflation. Both can be economically damaging, by, respectively, undermining the credibility of the local currency as a main store of value, or constraining growth by dampening consumption and business confidence.

• Credit extension: Early detection of credit bubbles and credit squeezes is vital for assessing sovereign risk. Scope has refined its measure of the credit-to-GDP gap to account for a sovereign’s credit flow imbalance as well as the risk of a credit bubble emerging as large deviations from trend, both positive (high leverage) and negative (deleveraging), are a vulnerability.

• Demographics: A country’s old-age dependency ratio, which indicates the share of the 65+ population dependent on the working-age population, captures more comprehensively the demographic challenges sovereigns face – pension funding, healthcare costs – than reliance on population-growth forecasts.

Scope’s fundamentals-based approach helps set the agency apart from its US rivals, illustrated, for instance, by how the creditworthiness of euro area periphery countries was assessed between 2009-2018.

Scope downgraded Portugal, Greece, Italy, Ireland and Spain ahead of its competitors, essentially between Q1 2009 to Q4 2010, ahead of the crisis. During the height of the crisis and market turmoil, from 2011-2013, Scope’s ratings remained largely stable, with the exception of Greece. After the crisis, Scope was quickest to upgrade ratings on structural reforms conducted at a national level and the euro area governance reforms, the impact of which has been underestimated.

“This rating cycle highlights Scope’s fundamentals-driven approach, which aims to balance accuracy and stability by focusing on a sovereign’s long-term structural issues as opposed to short-term cyclical trends or market movements,” says Barisone.

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Brexodus from City of London to the EU slows

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Brexodus from City of London to the EU slows 1

By Huw Jones

LONDON (Reuters) – The shift in financial staff and assets from the City of London to the European Union because of Brexit has eased after Britain completed its full departure from the bloc, a tracker from consultants EY showed on Tuesday.

Financial services are not included in the EU-UK trade deal that came into effect on Jan. 1, largely cutting off the City from the EU.

Financial firms in Britain have opened subsidiaries in the EU, with Dublin and Luxembourg the most popular destinations, EY said.

“After the major hurdle of standing up new EU hubs, the days of significant swathes of asset and job relocation announcements appear to have passed and will likely be replaced by the slower yet ongoing movement of people and assets to Europe for compliance purposes,” Omar Ali, a financial services managing partner at EY, said.

EY said in its latest Brexit Tracker that job moves have risen to almost 7,600, up by 100 since October, while the number of new hires in Europe since Britain’s EU referendum in 2016 remains flat at around 2,850 new jobs.

The loss is a small fraction of total jobs in British financial services and is far lower than initial predictions.

There was also an incremental rise in the relocation of assets, now totalling almost 1.3 trillion pounds ($1.82 trillion), up from 1.2 trillion pounds previously, EY said.

On Jan. 4, more than 8 billion euros ($9.63 billion) in daily share trading shifted from London to Amsterdam and Paris, followed by chunks of trading in euro-denominated swaps.

The EU is targeting the clearing of euro swaps, which London dominates, although EU’s Ali said splitting markets would not benefit Europe.

“Fragmentation of European financial services will serve to only benefit the U.S. and Asia,” he said. Some of the swaps trading that has left London has moved to New York.

EY calculated its figures from public statements by 222 of the largest banks, insurers, fintechs and asset managers since June 2016 to the end of February 2021. A quarter, or 57 firms, said Brexit has or will have a negative impact on them, up from 49 in January 2020.

(Reporting by Huw Jones; editing by Barbara Lewis)

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Climate extremes seen harming unborn babies in Brazil’s Amazon

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Climate extremes seen harming unborn babies in Brazil's Amazon 2

By Jack Graham

(Thomson Reuters Foundation) – A new study that links extreme rains with lower birth weights in Brazil’s Amazon region underscores the long-term health impacts of weather extremes connected to climate change, researchers said on Monday.

Exceptionally heavy rain and floods during pregnancy were linked to lower birth weight and premature births in Brazil’s northern Amazonas state, according to the researchers from Britain’s Lancaster University and the FIOCRUZ health research institute.

They compared nearly 300,000 births over 11 years with local weather data and found babies born after extreme rainfall were more likely to have low birth weights, which is linked to worse educational, health and even income attainment as adults.

Even non-extreme intense rainfall was linked to a 40% higher chance of a child being low birth-weight, according to the study, published on Monday in the Nature Sustainability journal.

Co-author Luke Parry said heavy rains and flooding could cause increases in infectious diseases like malaria, shortages of food and mental health issues in pregnant women, leading to lower birth weights.

“It’s an example of climate injustice, because these mothers and these communities are very, very far from deforestation frontiers in the Amazon,” Parry told the Thomson Reuters Foundation.

“They’ve contributed very little to climate change but are being hit first and worst,” he added, saying he had been “surprised by just how severe these impacts are”.

Severe flooding on the Amazon river is five times more common than just a few decades ago, according to a 2018 paper in the journal Science Advances.

Last week, Brazilian President Jair Bolsonaro visited the neighbouring state of Acre in the Brazilian rainforest, which is under a state of emergency after heavy flooding.

Parry said local people had adapted their lifestyles to deal with climate change, but that “the extent of the extreme river levels and rainfalls has basically exceeded people’s adaptive capacities”.

The negative impacts were even worse for adolescent and indigenous mothers.

The study said the “long-term political neglect of provincial Amazonia” and “uneven development in Brazil” needed to be addressed to tackle the “double burden” of climate change and health inequalities.

It said policy interventions should include antenatal health coverage and transport for rural teenagers to finish high school, as well as improved early warning systems for floods.

(Reporting by Jack Graham; Editing by Claire Cozens. Please credit the Thomson Reuters Foundation, the charitable arm of Thomson Reuters, that covers the lives of people around the world who struggle to live freely or fairly. Visit http://news.trust.org)

 

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Energy leaders grapple with climate targets at virtual CERAWeek

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Energy leaders grapple with climate targets at virtual CERAWeek 3

By Ron Bousso and Jessica Resnick-Ault

NEW YORK (Reuters) – Global energy leaders and other luminaries like incoming Amazon Chief Executive Andy Jassy focused on the tough road to transforming world economies to a lower-carbon future at the kickoff of the world’s largest energy conference on Monday.

Numerous speakers at CERAWeek were prepared to talk about the energy transition and the need for future investment in renewables. But many oil and gas executives were vocal about the need for more fossil-fuel investment in coming years, even as a way of leading the world to a lower-carbon future.

“One of the most urgent things we can do to combat global warming is to back carbon-emitting companies that are committed to get to net zero,” said Bernard Looney, CEO of BP Plc, one of several European oil majors to have committed to ambitious targets of cutting emissions to reach net zero carbon by 2050.

CERAWeek was canceled last year due to the coronavirus pandemic, which stopped billions of people from traveling and wiped out one-fifth of worldwide demand for fuel.

The U.S. fossil fuel industry is still reeling after tens of thousands of jobs were lost. The pandemic has instead accelerated the transition to renewable fuels and electrification of key elements of energy use. Global majors have been playing catch-up, responding to demands from investors to lower production of fuels that contribute to global warming.

The primary message on Monday, however, was that achieving net zero – where polluting emissions are offset by technologies that absorb carbon dioxide for the atmosphere – is going to be difficult.

“There just isn’t yet enough renewable energy to fuel all of the energy that people need. That’s in developed countries,” said Andy Jassy, head of Amazon.com Inc’s cloud division who will succeed Jeff Bezos as CEO this summer.

He said the company had announced its goal for net zero emissions at a time when it had not entirely figured out how to get there.

Since the 2019 conference, many of the world’s major oil companies have set ambitious goals to shift new investments to technologies that will reduce carbon emissions to slow global warming. BP has largely jettisoned its oil exploration team; U.S. auto giant General Motors Co announced plans to stop making gasoline and diesel-powered vehicles in 15 years.

Oil companies have come under increasing pressure from shareholders, governments and activists to show how they are changing their businesses from fossil fuels toward renewables, and to accelerate that transition. However, numerous speakers warned that the viability of certain technologies, such as hydrogen, remains far in the future.

Hydrogen “is a very small business at this point in time, it will scale up, and it will take a long time before it is a business that is large enough to start making a real difference on sort of planetary scale,” said Royal Dutch Shell CEO Ben van Beurden.

Other speakers expected to appear include several representatives from national oil companies along with CEOs of Exxon Mobil, Total, Chevron and Occidental Petroleum, though many are participating in panels focusing on the energy transition.

Mohammed Barkindo, secretary general of the Organization of the Petroleum Exporting Countries, was scheduled to appear, but backed out, citing a conflict.

Some CEOs said more oil and gas investment was necessary.

“We don’t think peak oil is around the corner – we see oil demand growing for the next 10 years,” said John Hess, CEO of Hess Corp. “We’re not investing enough to grow oil and gas in the future,” he said, explaining that prices would need to rise to support that investment.

(Reporting By Ron Bousso, Jessica Resnick-Ault and Marianna Parraga; additional reporting by Valerie Volcovici, Stephanie Kelly, Jeffrey Dastin and Gary McWilliams; writing by David Gaffen; Editing by Marguerita Choy)

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