Thursday, February 12, 2009

Moody’s shakes up its triple A ratings

By David Oakley in the Financial Times:

The world’s most highly rated countries have for the first time been put into different categories reflecting their risks for credit downgrades, in a sign of the deepening financial crisis.

Moody’s Investors Service on Thursday split the 18 triple A rated nations, which are normally considered risk-free, into three categories with Spain and Ireland classed as the most vulnerable to downgrades because of their struggling economies.

With governments taking on record amounts of debt to pay for stimulus plans and bank bail-outs, Moody’s believes it is important to assess how far the triple A countries can stretch their balance sheets before they become a risk.

Pierre Cailleteau, chief economist for sovereigns at Moody’s, said: “For a long time, a triple A credit was a completely safe investment. An investor could buy the debt of that credit without worrying, but the financial crisis has changed the rules.

“With record amounts of debt and leverage in a very severe and synchronised ongoing global downturn, more questions have to be asked about the safety of public debt.

“We believe we need to provide investors with more information, and to differentiate between even the highest credits, allowing investors to assess where the real safe sanctuaries are for their investments.”

Spain and Ireland, which was put on negative outlook by Moody’s last month, are considered the most in danger of losing their prized triple A ratings because of the amount of private debt that has built up in these countries. They have been put in the lowest category of “vulnerable” to a downgrade.

In contrast, the US and UK, which have also built up large levels of debt in the private sector, are considered safe from downgrades because their economies are considered much more flexible and efficient. They are classed as resilient to a downgrade.

The 14 other triple A rated countries, which include Germany, France, Australia and Canada, are considered safe from downgrades too because they have been less exposed to the financial crisis, with, in general, more stable housing markets and banking sectors. These countries are classed as resistant to a downgrade by Moody’s.

Moody’s report follows concern among investors over these triple A rated nations, with speculation that even the US, the world’s largest economy, could face a downgrade because of the severity of the financial ­crisis.

Spain was downgraded by rival ratings agency Standard & Poor’s last month, becoming the first triple A nation to lose its top-notch status since Japan in 2001 and the first since the financial crisis blew up in August 2007. Two other eurozone nations, Greece and Portugal, were also downgraded last month by S&P, and the agency put Ireland on negative outlook.

The growing worries over sovereign debt have been reflected in bond yield spreads. Yields on 10-year Spanish bonds are now more than 100 basis points higher than those of benchmark German yields – nearly four times the level a few months ago – in spite of both countries being triple A.

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