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BW Businessworld

From Star To Junk

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Ever wondered what a global creditworthiness map would look like? One way to visualise it is through sovereign credit ratings put out by rating agencies such as Standard & Poor's, Moody's or Fitch Ratings. And as we are buffeted by waves of the latest global financial crisis — the sovereign debt crisis in the euro zone — a look at how ratings are distributed is a nervous experience.

Consider this: 124 countries are rated by the agencies. Sixty-one other countries —  among the most underdeveloped economies — are not rated at all. The debt of 55 countries — including that of Greece and Argentina — has ‘junk bond' status, meaning they are speculative grade bonds (BB+ and below, and their equivalent).

Another 21 countries are on the cusp, at the lowest investment grade rating of BBB: no prizes for guessing that countries such as Spain and Portugal are the most obvious candidates (the former being the latest to be downgraded early in June); but also on this list are three of the four BRIC nations: India, Brazil and Russia. Other notables are Mexico and Indonesia.

What about the top rated economies, the triple-A countries? There are just 14, of which four are city-states: Singapore, Hong Kong, Liechtenstein and Luxembourg, the four Nordic countries and two from Continental Europe, Germany and the Netherlands. And the US is a notch below, at AA+.

In its annual report for the year 2011-12, the Bank of International Settlements says: "Sovereigns have been losing their risk-free status at an alarming rate." That implies the quantity of high quality or risk-free debt is falling; since banks hold most sovereign debt, their portfolio quality is affected, too. Just look at how much it costs European banks that hold Greek, Spanish, Irish or Portuguese debt, and how much interest rates on their sovereign bonds have gone up. Ratings don't kill sovereigns, ratings users do.

(This story was published in Businessworld Issue Dated 09-07-2012)