Triple A sovereign ratings deposed; Double A becomes biggest category in government debt

arch 31, 2014 3:38 pm

Triple A sovereign ratings deposed

By Ralph Atkins and Keith Fray in London

The triple A government bond is dead. Long live the double A bond.

The global pool of government bonds given a top “risk free” rating by all three main credit rating agencies has contracted by 6 per cent over the past year and by more than 60 per cent since 2007, according to Financial Times analysis.

If ratings from the three agencies are averaged, the pool of government bonds in the double A rated band has this year overtaken the triple As to become the largest category in sovereign debt markets.

The shift highlights how the huge cost of the financial crisis and the eurozone’s debt woes have undermined the creditworthiness of the world’s advanced economies. Governments have been forced to bail out banks while the slump in economic growth stretched the public finances.

“Relying exclusively on the so-called triple A standard to reliably measure the safety of sovereign assets seems, indeed, perilous,” the OECD warned in a report last week. But if governments with a double A rating, or even a single A were included, there was no shortage of “safe assets” in the financial system, the OECD concluded.

The FT analysis shows ratings have stabilised globally over the past year and there are signs of possible future improvement in Europe, but there is little chance of a rapid turnround in developed markets.

“There are no outlooks on Aa ratings currently anywhere in the world that would suggest an increase in the pool of Aaas in the next 18 months,” said Bart Oosterveld, head of sovereign ratings at Moody’s.

To shift developed economies towards positive rating outlooks and eventual upgrades would take “primarily a change in debt trajectories – which we don’t really see happening yet”, said James McCormack, head of sovereign ratings at Fitch. “We see debt ratios stabilising for the most part – but typically not this year.”

There are no outlooks on Aa ratings currently anywhere in the world that would suggest an increase in the pool of Aaas in the next 18 months

– Bart Oosterveld, Moody’s

In emerging markets, the FT analysis shows the trend towards upgrades seen since 2007 has stalled, with mixed performances over the past year.

The Netherlands has joined the list of countries that have lost their “nine A status” – a triple A rating from all three agencies. That reduced the pool of nine A debt by 6 per cent to $5.9tn, equivalent to just 11 per cent of all government bonds rated by the agencies. Since 2007, the list of nine As has contracted by 62 per cent.

If ratings applied by the three agencies are averaged and weighted according to the size of debt markets, triple A rated government debt fell from 34.5 per cent of the total a year ago to 32.3 per cent. The share accounted for by double As rose from 34.3 per cent to 36.6 per cent.

Investors have become used to the shifting global credit rating map. After the US lost its triple A status from Standard & Poor’s in August 2011, Treasury yields, which move inversely with prices, actually fell. Other big economies with ratings in the AA bands from at least one agency include France, Belgium and New Zealand.