Final Thoughts On Spain Downgrade

By Marc Chandler On Sep 30, 2010

by Win Thin of BBH

Here are some final thoughts on the Moody’s downgrade of Spain. In general, Moody’s has been too soft on Europe and the downgrade to Spain was long overdue. We still believe that the downgrade story will remain in play for several countries in Europe, but we also stress that the trajectory is much different in EM, where most countries are seeing upward ratings pressures. This fits in with our belief that the fundamental divergences between the developed world and EM will continue to favor EM assets into 2011. Here is our most recent ratings summary for Q3. We are currently in the process of producing our Q4 update to our ratings model, with results to be published shortly.

After losing its AAA status from S&P last year and now this year from both Moody’s and Fitch, Spain still remains vulnerable to further downgrades. Our model rates Spain as A+/A1/A+ compared to actual ratings of AA/Aa1/AA+, and we believe Moody’s was too optimistic in moving to a stable outlook.
After the most recent downgrade to A- by S&P, we believe Portugal is correctly rated there but Moody’s A1 and Fitch’s AA- need to be adjusted downward as our model rates Portugal at A-/A3/A-
Ireland remains vulnerable to further downgrades as our model rates Ireland as A-/A3/A- vs. actual ratings of AA-/Aa2/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 downgrade.
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-
Our sovereign ratings model now puts France as a borderline AA+/Aa1/AA+ credit, so there are rising risks that France falls below AAA/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.