After Greece, Portugal and Spain suffered rating downgrades in April due to escalating fiscal problems, investors ask if the same standards are being applied to advanced economies.
While there is a broad agreement among investors that credit rating agencies were justified in downgrading peripheral European sovereigns last month, investors are questioning why advanced economies such as the UK, the US and Japan – which face mounting fiscal problems of their own – have managed to retain their triple-A ratings.
The rating agencies haven't been consistent and some countries have been singled out more than others,” says Achilles Risvas, a managing partner at Dromeus Capital in Geneva.According to the International Monetary Fund, US debt-to-GDP is predicted to hit 109.7% in 2015, up from 83.2% at the end of last year. Over the same period, the UK’s debt ratio is expected to increase from 68.2% to 90.6%; while Japan’s debt burden is forecast to reach 248.8% in 2015, up from 217.6% at the end of 2009.
Paul Rawkins, senior director of sovereign ratings at Fitch, however, insists that the status of the major economies as benchmark sovereign issuers has to be taken into account in the rating process.
“Fitch applies a uniform sovereign rating methodology to all the sovereigns we rate,” says Rawkins, who argues that because the UK and US are “large benchmark borrowers”, they are able to borrow at lower interest rates, and so enjoy lower debt servicing costs than peripheral countries.
Shahid Ikram, head of global sovereigns and absolute return at Aviva Investors, is unconvinced. He shares Risvas’ view there is a discrepancy in the application of downgrades, and that the UK’s triple-A rating is dubious given the severe fiscal problems it faces.
“People are looking at the peripheral economies, but you could have similar fears about Japan, the UK and the US. It’s a global phenomenon. Take the UK: look at its headline fiscal deficit, aggregate the fact that the public sector pension fund is off balance sheet, and that a lot of our recent capital investment from a government perspective has been done through private finance initiatives, and you see that we have a colossal problem. If I can see that, rating agencies should be able to see it as well,” says Ikram.
“The agencies clearly have to look at the UK and the US,” agrees Jamie Stuttard, head of European and UK fixed income at Schroders. “As the finances of the UK and the US deteriorate, those publishing labels of their creditworthiness need to act accordingly. What we see in these two countries are clearly deep, deep problems in both the financial and consumer sectors which have become public sector problems over the last two or three years.”
On April 9, Fitch cut Greece’s sovereign rating two notches to BBB-, and on April 22, Moody’s downgraded Greece one notch from A3 to A2. Both agencies currently have Portugal (rated Aa2 by Moody’s, and AA- by Fitch) on negative watch, signalling the possibility of downgrades over the next few months.
On April 27, Standard & Poor’s downgraded Greece’s sovereign debt to junk status, lowering the rating to BB+ from BBB+, and Portugal was cut two notches from A+ to A-. The following day, the agency downgraded Spain one notch from AAA to AA+, reflecting fears of widespread contagion across southern Europe.
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