Standard and Poors had their hands full today cutting credit ratings. They cut Ireland. But, they also cut Hungary, putting the country just above a junk credit rating. I don’t think these will be the last sovereign debt ratings downgrades, especially in emerging markets — economies worldwide are deteriorating.
The Brown Brothers Harriman currency group has released a view that includes South Africa, Poland, Mexico and Korea as well as Hungary.
Here is what Win Thin, a senior currency strategist in the group, had to say about the downgrades:
S&P has been busy today. Besides downgrading Ireland, it also cut Hungary by one notch to BBB- with the negative outlook kept. Just like they missed the mark with regards to subprime, so too did these agencies overrate many of the weaker EM credits (was Iceland really AAA?). Our internal sovereign ratings model (which we just updated for the latest FX quarterly) puts Hungary at a BB- rating vs. BB last quarter and actual ratings of BBB-/A3/BBB actual. Yes, Moody’s still puts Hungary at A3 (equivalent to A-). We think junk status is in the cards shortly for Hungary, and to reiterate our rather frank view, most of these EMEA credits really never deserved to be investment grade in the first place. Our model points to severe downgrade risks in the Baltics and the Balkans. We think Poland and South Africa face modest downgrade risk in 2009, as does Korea and Mexico. Otherwise, we believe the lion’s share of downgrades this year will be in the EMEA region. EUR/HUF likely to retest the 317 high.
Obviously emerging market risk still remains quite elevated and will not diminish for some time to come.