Just yesterday in discussing S&P’s decision to keep the UK’s credit rating outlook at negative, Win Thin, Marc’s colleague at BBH, drew up the following chart of developed countries’ credit ratings. Notice how Portugal’s BBH implied rating is in line with the new rating and S&P’s already lower A-.
Win correctly predicted the Portugal downgrade and had this to say about Portugal and the other sovereign issuers in Europe:
Here is our most recent ratings summary for Europe.
After the most recent downgrade to A- by S&P, we believe Portugal is correctly rated but is still vulnerable to further moves given the negative outlook that remains in place. For sure, Moody’s Aa2 and Fitch’s AA- need to be adjusted downward as our model rates Portugal at A-/A3/A-
After losing its AAA status from all three agencies early last year, Ireland was downgraded further by all three later in 2009. It still remains vulnerable to further downgrades as our model rates Ireland as A-/A3/A- vs. actual ratings of AA/Aa1/AA-
After the downgrades to BB+ by S&P and Ba1 by Moody’s, Greece appears to be correctly rated as our model shows it at BB+/Ba1/BB+. However, Fitch’s BBB- is vulnerable to a downgrade
After losing its AAA status from S&P last year and this year from Fitch, Spain still remains vulnerable to further downgrades. Our model rates Spain as A+/A1/A+ compared to actual ratings of AA/Aaa/AA+, and there is no way it holds onto its Aaa status from Moody’s in this current environment, especially after that agency put the rating on watch for a downgrade last month
Italy has so far escaped any rating action during this cycle, but is vulnerable as our model puts it at A+/A1/A+ compared to actual ratings of A+/Aa2/AA- 6. Our sovereign ratings model now puts France as a borderline AA+/Aa1 credit, so there is rising risks that France falls below AAA/Aaa in the coming quarters. Because France is on the borderline, the case for an immediate cut is not compelling but certainly needs to be monitored closely.
So, we should expect further ratings pressure on European sovereign debtors moving forward. In particular, Spain will almost certainly see further downgrades from Moody’s despite a sovereign debt to GDP ratio lower than Germany. The poor economic outlook, large budget gap, and the problems in Spain’s banking sector mean that it is not Aaa as rated by Moody’s.