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Moody's Investor Service warns that 2010 may be a tumultuous year for sovereign debt issuers due to uncertainties surrounding the likely pace and intensity of fiscal and monetary exit strategies as governments start to unwide quantitative easing programs.

According to Moody's, the only certainty is that the exit strategies will be fraught with a good deal of execution risk. "The key policy challenge facing advanced economies is to time the exit perfectly: not too quickly or too soon so as to prevent choking off growth; and not too slowly or late so as not prevent choking off growth; and not too slowly or late so as not to unsettle financial markets," says Pierre Cailleteau, managing director of Moody's Global Sovereign Risk Group.

In its first annual "Sovereign Risk: Review 2009 & Outlook 2010" report entitled "Fasten Your Seat Belts: Tumultuous Times Ahead," the rating agency says that the context for sovereign risk assessment has changed dramatically since the beginning of the crisis in mid-2007. "This is mainly because of the crisis of public finances that has beset many rich countries in what Moody's believes will be the final--and disturbingly long-lasting--stage of the crisis," explains Cailleteau.

Cailleteau says that the overriding theme is that 2010 will be at best see "normalization" and at worst a severe tightening in government financing conditions. He adds that long-term interest rates may increase more rapidly than expected, driven by the slow unwinding of quantitative easing. Moody's says that the end to exceptionally low financing conditions will expose the true cost of the crisis on government debt affordability across the world.

A further key theme is that Aaa governments will probably not have the luxury of waiting for the recovery to be secured before announcing and perhaps also implementing credible fiscal consolidation programs. Moreover, as most governments simply cannot afford another financial crisis, they will attempt to ring-fence their balance sheets from selected contingent liabilities. "This could in some cases create disorderly market conditions," cautions Cailleteau.

Moody's also notes that Economic and Monetary Union membership will protect some countries against liquidity risk but not against long-term insolvency risk.

"Despite a slow process of global sovereign risk convergence--such as a narrowing of the ratings gap between rich and poorer G20 countries--BRIC countries are unlikely to replace the large Aaas' role as anchors to the system any time soon," says Cailleteau.

Another theme identified by the Moody's report is that the crisis has once again revealed the dangers of financial globalization for emerging markets--namely, the upside of the recurrence of asset price inflation after the downside of precipitous outflows of capital. However, the arsenal of policy levers has not expanded.

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