More Thoughts On Today’s Ratings Actions

By Win Thin, Global Head Of Emerging Markets Strategy, BBH

Here are some more thoughts on Moody’s actions today. In general, Moody’s has been too soft on Europe and so putting Ireland’s rating on review for possible downgrade (just like its Spain downgrade last week) 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.

Ireland remains vulnerable to further downgrades as our model rates Ireland as A-/A3/A- vs. actual ratings of AA-/Aa2/AA-. As such, an actual downgrade is highly likely and given the deterioration in the country’s outlook, we cannot rule out a two notch move to A1 (equivalent to A+) by Moody’s in the coming weeks. Debt ratios continue to blow out due to combination of increased banking sector bailout costs as well as ongoing recession/deflation.

Interestingly, Moody’s today also highlighted upgrade risks for Greece. It has only been a little more than three months since it cut Greece by 4 (!) notches in one fell swoop to Ba1 junk rating on June 14, and now Moody’s is saying that the fiscal reform trajectory may boost the country’s rating outlook? This sort of about-face in Moody’s underscores just how little credibility the rating agencies have right now as they flail about to rate these countries. Yes, the situation is often fluid, but changes in sovereign creditworthiness don’t happen overnight. As we wrote several months ago, “To be clear, our model has been highlighting significant downgrade risk for Portugal, Ireland, Greece, and Spain since June 2009. The problems facing these peripheral countries are nothing new, and these problems are also not likely to be solved over the near-term.

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, and we see little upside rating risk right now and so see Greece’s ratings remaining stable for the most part in the coming months.

Lastly, to underscore the different ratings trajectories between EM and developed world, Moody’s raised the outlook on Turkey’s Ba2 rating to positive from stable. Agency cited improvements in the economy and debt profile as reasons behind the move. Our model rates Turkey BB+/Ba1/BB+ vs. actual ratings of BB/Ba2/BB+. Fitch’s BB+ rating is right on the button. Eventually, we believe Turkey will gain investment grade status, possibly as early as 2011 but more likely in 2012.