The BBB credit ratings traffic jam

December 17, 2012

Adversity is a great leveller. Just look at the way sovereign credit ratings in the developed and emerging world have been converging ever since the credit crisis erupted five years ago. JPMorgan  has crunched a few numbers.

Few were surprised last week by S&P’s decision to cut the outlook on Britain’s AAA rating to negative. That gold-plated rating is becoming increasingly rare — according to JP Morgan, just 15 percent of global GDP now rates AAA with a stable outlook — a whopping comedown from 50 percent in 2007. Only 13 developed economies are now rated AAA, compared to 21 before the crisis. And only one, Australia, now has a higher rating (AAA) than in 2007 — 16 of its peers have suffered a total of 129 downgrades in this period.  With 20 rich countries on negative outlook, more downgrades are likely.

Emerging sovereigns, on the other hand, have enjoyed 189 upgrades (43 percent of these were moves into investment grade). That has caused what JPM dubs “a traffic jam”  in the triple B ratings area, with 20 percent of world GDP now rated at this level, compared to 8 percent in 2009.

To judge the scale of that re-rating, look at JP Morgan’s EMBI Global sovereign emerging debt index.  The bank says 63 percent of the EMBIG now rates as investment grade — up from 2 percent in 1993 and around 40 percent in 2007. JPM writes:

The years 2011-2012 will be  remembered for the deepening of the Eurozone crisis and a wave of sovereign ratings downgrades across the US, Europe and Japan…The gap between DM and EM sovereign ratings has narrowed, with a growing concentration of EM and DM in the triple-B rated bucket.

Not to say the picture is totally bright. The policy progress evident in many emerging markets before 2007 has slowed and many big developing countries — notably India, South Africa, Hungary and Egypt — are facing downgrades in the coming year.  JPM still predicts 18 upgrades for emerging markets in 2013 (after 26 in 2012) but it also expects 13 downgrades.

So, can the developed world claw its way back to the AAA area? Possibly,  but it will be a arduous process.  Iceland, downgraded from AAA in 2006, took two years to climb into investment grade from junk and still languishes at BBB-minus, the lowest investment grade rung. Canada, Denmark, Sweden and Finland, who fell from grace in the late 80s/early 90s, made it back after around a decade.

But others have never made it back. JPM reminds us that Venezuela was rated AAA in the early 1980s.


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