Another Aaa Rating Bites the Dust – Who’s Left?

standard and poors buildingOn Friday, Moody’s downgraded the United Kingdom’s government bond ratings (both domestic- and foreign-currency ratings) by one notch to Aa1 from Aaa.  The ratings outlook, which was changed to negative in February 2012, is now once again stable.  With the recent downgrade of the U.K., readers might be wondering which sovereigns with the coveted Aaa designation remain?  To answer that question, I put together the following two tables—one for Moody’s and one for S&P.  The tables show those sovereigns with Aaa/AAA ratings (both domestic- and foreign-currency ratings) from Moody’s and S&P respectively as well as the current ratings outlook.

Moody’s – Aaa Rating

Outlook

Australia Stable
Austria Negative
Canada Stable
Denmark Stable
Finland Stable
Germany Negative
Isle of Man Stable
Luxembourg Negative
Netherlands Negative
New Zealand Stable
Norway Stable
Singapore Stable
Sweden Stable
Switzerland Stable
United States of America Negative

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

S&P – AAA Rating

Outlook

Australia Stable
Canada Stable
Denmark Stable
Finland Stable
Germany Stable
Hong Kong Stable
Liechtenstein Stable
Luxembourg Stable
Netherlands Negative
Norway Stable
Singapore Stable
Sweden Stable
Switzerland Stable
United Kingdom Negative

 

Perhaps some readers are a bit surprised to see the number of Aaa/AAA-rated sovereigns remaining.  Moody’s still has 15, and S&P has 14.  But there are two things investors should keep in mind when thinking about a sovereign credit rating:

First, remember that a sovereign rating is supposed to represent the risk of an outright debt default.  Despite a country’s finances appearing to be in complete shambles, if the debt of that country is denominated in a currency that the country in question can print, and the country in question has shown a willingness to monetize its debt, then an outright default becomes less likely.  Of course, the debt monetization could spark enough inflation that bondholders would consider the monetization a type of default.  But as long as the bonds continue to be paid off, technically they have not been defaulted on.

Second, don’t underestimate the role that an awareness of the consequences of one’s actions plays in decision making.  Just as a country may be reluctant to bring large-scale civil or criminal charges against its too-big-to-fail banks (and employees) for fear of damaging investor confidence in those banks, so too might a rating agency be cognizant of the ramifications of its downgrading certain sovereigns.  Credit—more specifically cheap credit—plays an important role in allowing certain nations to run the large deficits they are running.  The major rating agencies are likely aware of their role in helping certain countries keep their funding costs down.  I will let you be the judge of whether that might, in any way, influence a rating agency’s decision-making process.

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