sovereign ratings

S&P joins Fitch in placing Ireland on a sovereign rating of AA- today; Moody’s rating remains a notch higher at AA. Ireland keeps its second position in the PIIGS’ line-up, however, which runs broadly: Spain, Ireland, Italy, Portugal and then Greece. Play with the graphic below for more.

The current debt trajectory of the US may imperil the country’s future Aaa rating, Moody’s has said.

Steven Hess, senior credit officer at the ratings agency, told Bloomberg the US needed a strategy to tackle its deficit: “Having a clear plan certainly increases confidence and the U.S. doesn’t have that yet… the debt trajectory as it is now is something that might potentially cause us to consider whether the US is Aaa at some point in the future.” Read more >>

Ratings agency Moody’s has downgraded Portugal’s debt issuer rating from Aa2 to A1; the outlook is now stable. The short-term issuer rating is affirmed at Prime 1 with stable outlook. The action concludes a downgrade review that began on May 5. The level remains above the (temporarily lowered) BBB- required by the ECB to accept a sovereign’s bonds as collateral.

The rationale, straight from Moody’s:

Moody’s is ‘cautiously optimistic’ for the continued recovery of Middle East sovereigns (although this excludes the Dubai government, which is not rated by the ratings agency).

A sluggish global recovery will gain momentum and investor confidence will rebuild, predicts Moody’s Investors Service. So far this year, all Middle East ratings changes have been upward (Oman – Feb 18, Saudi Arabia – Feb 15). Moody’s points out that the region suffered a ‘relatively mild’ crisis. Read more >>

Local governments are almost certainly paying a premium when they raise debt by themselves – which they are doing in large and increasing volumes. Last year, Europe’s regional governmental (‘sub-sovereign’) debt stood at more than €1,200bn.

Particularly stung are Russia and France, which comprise between them the entire top 20 worst affected sub-sovereign debt holders. By contrast, two Spanish communities actually benefit – with better sovereign ratings than central government. Perhaps the Spanish government should be borrowing from themRead more >>

Fitch Ratings has today revised the Russian Federation’s ratings outlook to stable from negative.

This means Fitch has changed its view that a sovereign rating downgrade is likely. A stable outlook means no ratings change is expected. Read more >>

Someone trading credit default instruments is getting a bad deal.

Governments are riskier than corporates, apparently. The cost of insuring against government default is pricier than the equivalent for companies, if credit default swaps are anything to go by. The news comes hot on the heels of a question posed by Michael Gordon last week: namely, whether government bonds should really be considered risk-free.

This should seem crazy. Governments and companies are not equivalent financial actors. Governments can raise tax, and go to war. But financial products whose value derives from these actors may be similar. This apparent disconnect should act as a warning to those who genuinely want to insure against default. The question is: are you interested in the default of a government/company, or are you just speculating? Read more >>

Clearly they are not, in fact, risk-free (Argentina proved this). But government bonds are nonetheless viewed as the sole risk-free asset, and banks are required to hold certain amounts of them in their portfolios. The risk-free (read: government) rate is also the basis for valuing almost all assets.

Whether this should be the case is a question posed today by Michael Gordon, former CIO of Fidelity. He argues corporate bonds might be a safer bet; some corporate bonds, after all, come with an implicit government guarantee. (Perhaps corporate bonds could be split into regular and TBTF bonds.) If the view caught on, a revolution would lie ahead for markets, involving mass revaluations and financial remodelling.

But his argument assumes all types of bond issuer are equivalent financial actors. I’m not convinced of this. Read more >>

Moody’s sovereign risk review is best described as sobering. There’s a risk of accelerating interest rate rises in 2010. There is also a risk of disorderly market conditions. We should limit our expectations on how much BRIC can help. And there is little comfort for Greece: euro membership may help with liquidity, but it is no protection against the risk of long-term insolvency. Key points below: Read more >>