credit ratings

Claire Jones

Credit rating agencies haven’t had a good crisis. But central bankers’ and regulators’ frequent barbs seem a touch hypocritical when one considers how much they rely on them.

Both in determining which assets are eligible as collateral for open-market operations, and the risk weights for regulations, the big-three rating agencies play a fundamental role.

In the United States, that’s set to change. Under Dodd-Frank, the US authorities must remove credit rating references and requirements from their regulations.

The Securities and Exchange Commission has now done so. And on Wednesday, the Federal Reserve’s Mark van der Weide said the central bank was examining three possible alternatives to replace the use of ratings in its risk-based capital rules. Read more

Another day, another sovereign downgrade, it seems. But is there a regional basis to recent downgrade activity?

In short, yes. Read more

Moody’s expects the next Portuguese government, due to be elected on June 5, to seek a bail-out as “a matter of urgency”, and as a result, the agency has again downgraded the sovereign’s rating. The rating now stands one notch lower at Baa1, and remains on watch for further downgrade. The rating is still two notches higher than peers S&P and Fitch, both rating the sovereign BBB-.

Portuguese sovereign ratings, which had been falling, entered a downward spiral once the government stepped down. Moody’s, which has just cut by one notch, previously cut by two on March 16. S&P downgraded Portugal two notches on March 25 and a further notch on March 29. Fitch downgraded by two notches on March 24 and a further three notches on April 1. Overall, about five notches have been taken off the rating since the start of the year. Read more

Markets remain nervous about Ireland after yesterday’s stress test results – despite the fact they appeared thorough and the €24bn recapitalisation they recommend matches expectations. This has prompted Europe’s biggest clearing house LCH.Clearnet to again raise the margin requirement on clearing of Irish debt, back up to 45bp from 35bp. Effectively, this increases the cost of holding Irish bonds and decreases the cost of shorting them.

Should all this post-stress-test stress lead to another downgrade, as seems likely, Dublin will be protected to a large degree by a lifeline from the ECB, which has pre-emptively suspended its collateral requirement for the country. Read more

They must have read our post. S&P just downgraded Cyprus by one notch to A-, keeping the outlook negative. A negative outlook is supposed to mean a downgrade is possible within two years, all else equal. But then S&P last downgraded the debt of the small island economy in November, four months ago. S&P’s rating is now the lowest of the three rating agencies, with Moody’s at A2 (=A) and Fitch significantly above the others at AA. Fitch, however, placed the rating on credit watch negative in January, meaning the review should be completed by mid-April. S&P appears to be significantly rethinking the eurozone’s creditworthiness, particularly in light of details of the rescue fund: it has not been a good week for eurozone credit ratings, and further downgrades may follow tomorrow when Ireland releases details of its stress tests.

Deja vu? No, ratings agency Standard and Poors has cut Portugal’s credit rating for the second time in less than a week, this time one notch to BBB-, leaving the rating with a negative outlook. Last week the agency cut by two notches – the most it could reasonably cut, given an explicit indication that they would be “unlikely” to cut by more. The agency left the rating on negative creditwatch, but that is usually interpreted to mean a further cut is likely in three months, not three days.

Greek ratings, meanwhile, have been cut deeper into junk territory with a two notch downgrade to BB-. The rating remains on negative creditwatch meaning a further cut is likely if there is no improvement; typically, that would be within three months, but in the current climate, who knows?

In both cases, the downgrades have been prompted by the structure of the permanent eurozone rescue fund, the ESM, which was confirmed at the end of last week by eurozone leaders. Two things in particular. One is the issue of subordination Read more

The ESM term sheet claims its first casualty. As predicted, Standard and Poors rating agency has downgraded Portugal by two notches to BBB, leaving the rating on creditwatch negative, meaning another downgrade is likely within three months if there is no improvement in the country’s financial prospects. A further downgrade could place Portugal’s rating below investment grade: S&P’s rating is now just two notches above junk. But by then, the country will have passed or failed two significant tests: refinancing its debt in the markets in April and June.

S&P’s move is likely to be more significant than recent downgrades by Moody’s and Fitch. That’s because, first, S&P is leading the rating descent, having downgraded Portugal to its current Moody’s/Fitch level of A- in May of last year. (Moody’s and Fitch have only just downgraded to this level.) Second, the downgrade is significant because of timing. With a key vote on Portugal’s austerity package yet to pass and the PM stepping down, fiscal discipline will be further delayed. (This is one reason given by S&P for the move.) More than that, general elections are expected in a few months, and it would be very tempting for a new government to restructure its debt, laying the blame with its predecessors. Similar temptations must be present in Ireland.

Fitch has just downgraded Portugal two notches to A-, placing the rating on credit watch down, meaning that further downgrades are likely. It’s not great news for the Iberian nation, which faces increasing pressure for a bail-out as yields rise and domestic politics worsen. But the bigger ratings news is yet to happen and it is likely to come from Standard and Poors.

Fitch’s downgrade just brings its Portuguese government rating in line with those of its peers: all three main agencies now hold equivalent ratings. Moody’s downgraded Portugal two notches to A3 (=A-) about a week ago, leaving the rating with a negative outlook. S&P was quicker off the mark, lowering its rating in April 2010 and placing the rating on watch down on November 30. Read more

The night before a government debt auction, Moody’s concluded its review of Portugal with a two notch cut to their credit rating, which now stands at A3. The rating agency also left the sovereign issuer with a negative outlook, implying further downgrades are likely within two years if there is no improvement.

According to central bank forecasts, the economy will contract by 1.3 per cent this year, pushing Portugal into its second recession in three years. Citing subdued growth prospects and high borrowing costs, Moody’s actions might aggravate both issues today. Portugal is aiming to raise up to €1bn in 12-month Treasury Bills at auction and yields in the secondary market – an indication of the government’s cost of debt at auction – have risen this morning and remain near record highsRead more

The cost of rehabilitating the Spanish banking sector is partly behind Moody’s decision to downgrade Spanish government debt from Aa1 to Aa2 today. The rating has been left with a negative outlook, meaning a further downgrade is likely within two years if there is no improvement. Moody’s also completed its review of Greek debt with a three notch downgrade earlier this week. It seems the agency has saved the most sensitive review – that of Portugal – till last; it is due out before March 21 but is more likely to appear next week.

Moody’s decision completes a set of Spanish downgrades by all three main ratings agencies in recent weeks. S&P downgraded to AA (equivalent to Moody’s Aa2) on February 1, and Fitch downgraded to AA+ (equivalent to Moody’s Aa1) on March 4. Reasons given: Read more

Ralph Atkins

Moody’s, the credit rating agency, has created a political storm in Athens by downgrading Greece’s government bonds by a further three notches. At B1 (down from Ba1), Greek bonds now “lack the characteristics of a desirable investment,” in Moody’s terminology.

But they are still acceptable for use as collateral in European Central Bank liquidity operations. Last May, the ECB suspended the minimum credit rating requirement for Greek debt – on the grounds that it had confidence in the country’s economic rescue plans, whatever the credit rating agencies thought. In other words, Greek banks could continue to obtain unlimited liquidity from the ECB, using their government bonds as collateral.

What is more, Moody’s announcement does not change anything in terms of the “haircut” – or discount – applied by the ECB to Greek bonds when calculating how much liquidity banks can obtain. Read more

Moody’s rating agency has just downgraded Greece’s government bonds to B1 from Ba1, placing the debt on negative outlook, meaning further downgrades are likely. The move takes Greek debt from borderline junk to “highly speculative” territory.

Fitch and S&P still rate Greek debt three notches higher at BB+ (the equivalent of Ba1, Moody’s previous rating), but this might not last long. Fitch last downgraded on January 14 and has a negative outlook on the rating, while S&P last downgraded in December but has the rating on credit watch negative (meaning a downgrade is imminent, if there is no material improvement). Read more

Bad day for Portugal. S&P has cut to junk the credit ratings of four state-owned utilities, saying the country’s sovereign debt troubles could limit the timeliness or sufficiency of help on offer from the government:

Government support for distressed state-owned companies was “increasingly constrained by difficult financial conditions”. This was also reflected in the “weak access” of Portuguese banks to external funding, S&P said. Read more

“The ECB should not issue public ratings to be used for regulatory purposes,” runs the response to an idea from the Commission. And the jury is also out on a publicly-funded agency other than the ECB issuing ratings.

Questions of independence are behind the ECB’s ratings reluctance. While the central bank does undertake in-house credit assessments, “the conduct of rating activity as in-house credit rating assessments always raised questions regarding reputation risks and potential conflicts of interest, beside other risks,” says the report.

As for an alternative, publicly-funded, body running the ratings, questions remain over independence and competition. “The degree of independence of such an agency funded wholly or partially by public money remains to be assessed,” says the report.  Aside from manpower and data requirements, it is also unclear whether “the creation of a semi-public agency would result in increasing competition, or rather create artificial barriers to entry for new private entities and therefore ultimately reduce competition”.

The spirit of the proposal was accepted, however, and the idea itself was not entirely scotched. Read more

Do the markets know something we don’t?

S&P cut Ireland’s credit rating by one notch today, taking it to A- (still several notches above Moody’s and Fitch, at equivalent peggings of Baa1 or BBB+ respectively). Yet markets continue to relax, with the Irish ten-year cost of debt falling 20 basis points today, a fifth of one percent; at 5.45pm they were 8.8 per cent.

The cost of debt for Spain, Portugal, Italy, Belgium and Greece have all fallen, too. Greek yields are below 11 per cent for the first time since early November.

Gary Jenkins, head of fixed income for Evolution Securities, says: “It is interesting that while the story [that the EFSF mandate will be widened to allow debt buybacks] has been doing the rounds for three weeks now, yesterday was the first day since then that we have witnessed yields moves of such a magnitude, which does make one wonder if there has not been a leak ahead of the European leaders’ summit on Friday.” Read more

Lisbon might soon have more difficulty accessing debt through the markets, precisely because Moody’s is worried that it will. With rather circular reasoning, Moody’s said it was placing Portugal’s A1 rating on downgrade review because of “concerns about Portugal’s ability to access the capital markets at a sustainable price”. Yields will no doubt rise further on the news.

Moody’s is also worried about the effect of bank support on the government’s debt, as well as the impact of austerity measures. The rating looks perilous, then, since Moody’s fears will rise whether Portugal cuts or spends. Read more

It jumped last but – not to be outdone – Moody’s has slashed five notches off its Ireland rating, taking it to Baa1 (which is equivalent to Fitch’s BBB+ and about three notches above junk). They’ve also slapped a negative outlook on it, meaning a further downgrade is likely in the next two years if there is no improvement. A multi-notch downgrade was likely – the ratings agency said so itself – though it has come relatively late in the game, after similar cuts by S&P and Fitch.

S&P now offers Ireland the highest rating at A, two notches above Fitch and Moody’s. Under the original ECB collateral requirements of A-, this would mean Ireland’s bonds could still be used – just – as collateral at the central bank. As it is, the “temporary” lowering of collateral requirements to BBB- is still in force, so Ireland need not worry. (As with Greece, the ECB would probably make an exception for Ireland even if its ratings were cut below this level.) Read more

S&P jumped first, but Fitch has jumped further: the ratings agency has just knocked three notches off its credit rating for Ireland, placing the outlook at stable. Fitch’s rating is down to BBB+ from A-. S&P cut its rating two notches from AA- to A on November 24. Fitch is now two notches below S&P.

Moody’s, which has threatened a multi-notch downgrade, is again the last mover. Its rating remains at AA. So – for now – the chance of an Irish default is roughly equal to that of Russia or Japan, depending which rating agency you follow. This is likely to be temporary: Moody’s will probably join Fitch in a three- or even four- notch downgrade within a couple of weeks.

Hungary’s credit rating is just one notch above junk since rating agency Moody’s cut two notches and warned of further downgrades. Concerns about fiscal sustainability led Moody’s to cut to Baa3, now in line with S&P. Fitch remains one notch above its peers, but is expected to cut by the end of the year. The cut places Hungary’s rating just a notch above that of Greece.

Last week, Hungary raised its key interest rate 25bp to 5.5 per cent to combat rising inflation expectations. It was the first rise since October 2008, and was largely unexpected by the markets.

Moody’s isn’t going to get caught out this time. The ratings agency has said today that its review of Irish sovereign debt is likely to end in a multi-notch downgrade. If we take “multi” to mean three or more, the current Aa2 rating will probably end up below those of S&P and Fitch.

Curious timing. All three agencies have stayed mute about Ireland in recent weeks. S&P and Fitch are yet to say anything and Moody’s has waited for the announcement of the aid package.

Perhaps there were burnt fingers over Greece. In the Spring, S&P and Fitch downgraded Greece as market fears intensified, adding to the commotion and leaving Moody’s in a very awkward place (had they downgraded Greece, they might single-handedly have disqualified Greek assets from being accepted as collateral at the ECB).

Rating agencies were heavily criticised for aggravating matters in April and May, Read more