Things you need to know about National Credit Ratings 1

On Friday 13th January 2012 we heard the worrying news that 9 Eurozone Countries have had their Sovereign Credit Ratings downgraded.

S&P downgraded the ratings of Cyprus, Italy, Portugal and Spain by two notches. Austria, France, Malta, Slovakia and Slovenia were all cut by one notch.

Last August America lost its AAA rating when S&P downgraded it to AA+, despite a deal being drawn to raise the US debt ceiling.

Credit ratings by agency and country

https://docs.google.com/spreadsheet/ccc?key=0AonYZs4MzlZbdDdpVmxmVXpmUTJCcm0yYTV2UWpHOVE&hl=en#gid=0

Out of the 135 Countries listed on the link above only 12 now have triple A ratings with all 3 agencies (S&P, Moody’s and Fitch) and they are listed below:

Australia

Canada

Denmark

Finland

Germany

Luxembourg

Netherlands

Norway

Singapore

Sweden

Switzerland

United Kingdom

The House of Lords EU Economic and Financial Affairs and International Trade Sub-Committee, chaired by Lord Harrison, conducted an inquiry into credit rating agencies and their influence on sovereign borrowing. The report was published on 21 July 2011.

The Committee’s four month-long inquiry into the agencies’ influence on the EU’s sovereign debt crisis concluded that their role in the 2008 banking collapse, which was rightly criticised, should not colour assessments of their decisions on EU sovereign debt.

The agencies have caused controversy each time they downgraded further the sovereign debt ratings of Greece, Ireland and Portugal. But the Committee said the downgrades “merely reflect the seriousness of the problems” in some Member States.

Why do the credit ratings matter?

The European Central Bank has basically said that for a year or two, it doesn’t matter whether eurozone banks find it impossible to borrow from commercial lenders in markets, because the central bank will lend what’s needed.

Even so, that doesn’t mean the downgrades will bring no pain to the eurozone. For the governments of France, Spain, Italy and so on, borrowing costs may go up.

So even if the downgrades don’t lead to default by a nation or a bank, they make it much harder for the banks – and in a way the whole eurozone – to get off life support.

The downgrades may not be lethal for the eurozone. But they keep the financial system and the economy in the sick bay.

That creates a damaging negative feedback loop (less lending means asset price falls, more bankruptcies, bigger losses for banks, and even less lending by capital-constrained banks) which makes it all the harder for the eurozone to break free of its cycle of decline.

http://www.bbc.co.uk/news/business-16557726

steve@bicknells.net