Posts tagged ‘S&P’

Drawing A Line

We saw recently how the ECB’s new bond-buying programme helped draw a line under the recovery in market sentiment. It feels as though a number of people are now less afraid of Europe than they were a few months ago.

Among those people, so it would seem, are the ratings companies. Last week we saw S&P downgrade Spain to a notch above junk – not good news, exactly, but a relatively moderate move (from BBB+ to BBB-). And then on Tuesday, Moody’s – who already had the country rated at the BBB- level, and “on watch” for future downgrades to boot – resisted the opportunity to put some distance between themselves and the competition by leaving their rating at investment grade. They specifically cited the possibility of further emergency lending together with bond market intervention by the ECB as reasons for their decision.

How times change. In July of 2011, Moody’s junked Portugal because of the intervention in debt markets being hinted at – but not by then even formally discussed – as part of the renegotiation of the Greek bailout. The following week they junked Ireland because they thought further emergency lending might be required to see it through its difficulties. Not to be left out, S&P waited until August then took some elegantly left-field action by notching the US down from AAA.

Back in 2011 the ratings companies were worried about falling behind the market and risking the same charges of over-optimism, incompetence or even negligence which they had faced as a big part of the credit market boom prior to the collapse of 2007-8. So what has changed?

The European downgrades last year were not well received. S&P’s and Moody’s offices in Milan were raided by police as Italy feared its ratings would be next. The EU began to take an interest in regulating the companies and there were appeals to take antitrust action against a perceived oligopoly. And action was taken by the ECB, ISDA and others to reduce the mechanistic reliance on credit ratings for the acceptance of loan collateral or the triggering of credit derivatives.

But more important than any of this must be the change in sentiment which recent months have seen. Last year’s downgrades really were chasing the market. Portugal’s five year bond yield began 2011 at 5.7%. By the time Moody’s slashed the rating in July this had more than doubled. This year things have taken a very different turn. When Moody’s cut Spain’s rating in mid-June its five year yield had jumped up past 6%; now it’s back to 4.2%.

None of this is to say that ratings are irrelevant – or that they were then. Portuguese paper suffered sharp falls when Moody’s pulled the plug, and Spanish bonds have found renewed support since they decided to hold fire. But what we surely can say is that these ratings decisions are a further sign that sentiment over the European crisis is bottoming out.

In the months ahead there is plenty of room for more scares. Ratings companies, governments, markets – the game goes on, and can always change. Still: it is encouraging to see that Moody’s, too, has drawn the line this week.

19/10/2012 at 5:27 pm

Muddling Through …

The UK economy is hardly unique in that it currently faces difficulties. Nor is it unique in enjoying “safe haven” status. While this status is not guaranteed, it is to be hoped that it will last until confidence returns. Unfortunately, this week’s release of government borrowing data for July has drawn increased attention to the country’s weak debt position – something with which readers of this blog will be familiar, but which has tended to be ignored or dismissed by most observers who have chosen to believe that the UK is undergoing an “austere” level of fiscal consolidation.

In the words of the report issued by the Office for Budget Responsibility:

Excluding the impact of moving the Royal Mail’s historic pension fund deficit and associated assets into the public sector, the March Economic and fiscal outlook (EFO) forecast a £5.1 billion improvement in PSNB in 2012-13 compared to 2011-12. But after the first four months of the financial year, PSNB (excluding Royal Mail) is £9.3 billion higher than last year.

The figures at the back of the OBR report show that this increase puts UK borrowing 26% over where it was for April-July last year, and that borrowing now needs to fall by 16% for the government to hit its (undemanding) target for reducing the 2012-13 budget deficit to £119.9bn from £125bn the previous year.

Still, we must not be too gloomy. As the OBR notes, monthly data on fiscal receipts and outlays are volatile and subject to revision. And only a month ago, S&P affirmed the UK’s AAA credit rating and stable outlook, while observing that they thought the OBR’s estimates for growth and government debt over the short term were too optimistic. (Their full report can be summarised as: “despite its weak growth and large debt burden, Britain isn’t in the euro and that’s good enough for us.”)

Like all governments, our own has made mistakes. The use of indirect taxes to help bolster receipts ramped up inflation, which squeezed wage growth and pushed the household sector into recession. And just as this effect has begun to recede, our strengthening currency has seen real exports fall for two consecutive quarters (sterling has risen some 11% against the euro over the last twelve months). But if there are no shocks, the economy should manage to muddle through the current period of stagnation. Growth should return, employment continue to grow – and debt reduction targets will have a much better chance of being hit.

All the recent borrowing numbers really do, then, is remind us that the UK has never been a safe haven from the sovereign crisis on the basis of its own debt fundamentals. If anyone begins to think that this matters – one of S&P’s competitor “agencies”, for instance – it could still spell trouble. Otherwise, Britain ought to get away with it.

24/08/2012 at 11:37 am 2 comments

Dying Breed

Last month we looked at the various refuges available to investors in the event of market panic. One of our conclusions was that:

The most effective hedge against panic is government bonds (though only those seen as safe).

Since then, both the broad statement and the caveat would appear to have been proved. From the US through Europe to Japan, developed market equity indices lost between 6% and 10% of their value (in local currency terms) during May. Gold and silver suffered by similar amounts. And government bond yields in several countries reached record lows, with ten year issues in Europe and the US posting gains of 3.5-4.5%.

As for the caveat: well, the price of the ten year Spanish benchmark fell by over 5% last month. Spain is certainly not a country seen as “safe” at the moment – as yesterday’s downgrade by ratings company Fitch underlined.

In fact, since we last looked at government bond ratings around the world, those rated “AAA” (as near as it’s possible to get to risk free) have become even more of a dying breed. The eurozone, of course, saw France and Austria fall to AA+ at S&P back in January. Finland, Germany, Luxembourg and the Netherlands are the only AAA rated euro countries left – and even they were subject to “negative watch” until a few months ago.

Outside the zone, the AAA club includes Switzerland, the Scandinavian countries and the UK – though even here there is uncertainty. S&P downgraded the Isle of Man to AA+ last November, and of course Fitch reminded us all yesterday that (along with Moody’s) they see the mainland’s AAA rating as being at risk over the next year or two as well.

There has been less drama in other developed countries. Japan suffered a couple of downgrades, but in any event has not been a AAA debtor for many years. The same goes for New Zealand. Outside Europe – following last summer’s US downgrade, again courtesy of S&P – the only other members of the AAA club remain Canada, Australia, and Singapore.

And yet there is a limit to the importance of all this. If bond markets close to an economy with deficit funding or debt refinancing needs, that is a serious development with potentially grim consequences. But if credit ratings fall, bond yields remain affordable and markets stay open, it’s a different story.

So it is interesting that ten year US and UK government bonds yield less than Dutch ones, even though their ratings and / or outlooks are “officially” worse. And Japan’s low bond yields are notorious despite the slow deterioration in its credit ratings over the years. At the other end of the scale, Spanish bonds have sold off today – but not by much (the ten year bond yield is currently 6.19%, 0.15% higher than yesterday’s close). And in Ireland, which is still rated junk by Moody’s, the same five year bonds that reached yields of over 17% a few months ago have spent most of 2012 below 6%.

Of course it is hardly necessary in these nervous times to remark that ratings companies may simply be getting ahead of the game. Perhaps Spain will follow Portugal into bailout country, despite the protestations of its government to the contrary, its relatively low debt burden and the yet more unpalatable fiscal trajectory that it might subsequently face. But bond market reactions to some of the higher profile sovereign downgrades we have seen in recent months suggest that they might have lost some of their power – to surprise, or influence, or both.

After all, take a step back and there is something rather funny about seeing Fitch downgrade Spain because it has to stand behind its banking system. A few short years ago, the ratings industry was citing likely sovereign support as a reason for being positive on rating bank debt through the cycle (banks being, by coincidence, among the keenest issuers of debt and the ratings companies’ biggest clients). Moody’s notoriously upgraded the big Icelandic banks – Glitnir, Landsbanki and Kaupthing – from single A to Iceland’s then sovereign rating of AAA in February of 2007, just as the first signs of the subprime crisis were becoming visible over the Atlantic, on this very logic. Within two years they had all got their sovereign support – and defaulted anyway.

The desirability of owning paper issued by a dwindling band of “safe” governments is understandable in a crisis. In recent times, however, investors have clearly looked beyond credit ratings in betting where safety really lies. Perhaps the ratings companies’ agitated caution will prove more insightful than their pre-crisis complacency. What is certain is that AAA-rated sovereign borrowers aren’t the only ones who don’t like the idea of numbering a dying breed.

08/06/2012 at 4:06 pm


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