Global pool of triple A status shrinks 60%, forcing investors and financial regulators to rethink definitions of “safe” assets.

March 26, 2013 7:34 pm

Global pool of triple A status shrinks 60%

By Ralph Atkins and Keith Fray in London

The global pool of government bonds with triple A status from the three main rating agencies, the bedrock of the financial ­system, has shrunk more than 60 per cent since the financial crisis triggered a wave of downgrades across the advanced economies.

The expulsion of the US, the UK and France from the “nine-As” club has led to the contraction in the stock of ­government bonds deemed the safest by Fitch, Moody’s and Standard & Poor’s, from almost $11tn at the start of 2007 to just $4tn now, according to Financial Times analysis.

The shrinkage, largely a result of US’s downgrade by S&P in August 2011, is part of a dramatic redrawing of the world credit ratings map, which is encouraging investment flows into emerging markets and forcing investors and financial regulators to rethink definitions of “safe” assets.

While US and European government downgrades have dominated headlines, the FT’s analysis highlights the series of upgrades across much of the rest of the world – especially in Latin America.

Topping the list in the scale of credit upgrades since January 2007 are Uruguay, Bolivia and Brazil. The biggest downgrades were in crisis-hit southern Europe, with Greece seeing the steepest drop.

The results highlight the geoeconomic changes wrought by the tensions in global financial markets since mid-2007 and the upending of previous assumptions about the stability of banking systems and public finances.

David Riley, global head of sovereign ratings at Fitch, said: “Five years ago, the world was a fairly predictable place. Banking crises were typically things that happened in emerging markets. Now we’re in a world where a lot of those assumptions have gone.”

The highest credit grades are still dominated by advanced western economies but average ratings over the past six years have fallen furthest in the crisis-hit eurozone. In contrast, the biggest average upward ratings have been in Latin America followed by newly industrialised Asian countries.

The shifts show “where strong and sustainable growth is likely to be in the future”, said Bart Oosterveld, head of sovereign ratings at Moody’s.

John Chambers, chairman of S&P’s sovereign ratings committee, said many emerging markets have undertaken reforms that have improved their credit standing. “Better economic conditions have helped. It is easier to carry out reforms when the wind is on your back, rather than in your face.”

Upgrades of emerging market economies have expanded the pool of government assets rated in the BBB range – although the category now includes several fallen European economies. Jonathan Kelly, portfolio manager at Fidelity Investments, said: “Emerging markets were once high risk, high return assets. They are now mainstream.”

A further shrinkage in the pool of triple A ratings could fuel fears about a looming “collateral crunch” – a shortage of those assets that can be used as security by banks and others when borrowing in capital markets or from central banks.

So far most observers believe such a crunch remains a long way off, partly because central banks and regulators have shown a willingness to rewrite the definitions of what is “safe”.

But collateral shortages have become acute for banks in those parts of the eurozone worse hit by the region’s debt crisis – and explain why the European Central Bank has had to authorise emergency liquidity for banks in Cyprus.

About bambooinnovator
Kee Koon Boon (“KB”) is the co-founder and director of HERO Investment Management which provides specialized fund management and investment advisory services to the ARCHEA Asia HERO Innovators Fund (, the only Asian SMID-cap tech-focused fund in the industry. KB is an internationally featured investor rooted in the principles of value investing for over a decade as a fund manager and analyst in the Asian capital markets who started his career at a boutique hedge fund in Singapore where he was with the firm since 2002 and was also part of the core investment committee in significantly outperforming the index in the 10-year-plus-old flagship Asian fund. He was also the portfolio manager for Asia-Pacific equities at Korea’s largest mutual fund company. Prior to setting up the H.E.R.O. Innovators Fund, KB was the Chief Investment Officer & CEO of a Singapore Registered Fund Management Company (RFMC) where he is responsible for listed Asian equity investments. KB had taught accounting at the Singapore Management University (SMU) as a faculty member and also pioneered the 15-week course on Accounting Fraud in Asia as an official module at SMU. KB remains grateful and honored to be invited by Singapore’s financial regulator Monetary Authority of Singapore (MAS) to present to their top management team about implementing a world’s first fact-based forward-looking fraud detection framework to bring about benefits for the capital markets in Singapore and for the public and investment community. KB also served the community in sharing his insights in writing articles about value investing and corporate governance in the media that include Business Times, Straits Times, Jakarta Post, Manual of Ideas, Investopedia, TedXWallStreet. He had also presented in top investment, banking and finance conferences in America, Italy, Sydney, Cape Town, HK, China. He has trained CEOs, entrepreneurs, CFOs, management executives in business strategy & business model innovation in Singapore, HK and China.

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