Moody’s says Not all Aaa Sovereign Debt Equally Safe
The increasing “socialisation of risk” has led Moody’s to acknowledge that not all Aaa-related sovereign debt is equally safe. In a new Special Comment, How Far Can Aaa Governments Stretch Their Balance Sheets?, Moody’s categorises Aaa countries into three groups.
“For a Aaa government to be downgraded, Moody’s must have concluded that the deterioration in credit metrics is (1) observable and material in absolute terms; (2) observable and material in relative terms; and (3) unlikely to be reversed in the near future,” Moody’s says. “The decision underlying a potential downgrade would also depend on the extent of the actual and potential deterioration of a government’s balance sheet; whether a country’s economic model can be regenerated, thereby allowing the economy to rebound; and whether governments can repair their fiscal position by raising taxes or cutting expenditure.”
Moody’s report concludes that all Aaa governments are affected, but to different degrees.
The rating agency distinguishes between three groups of countries:
- Resistant Aaa countries, such as Germany, whose rating is so far largely untested despite strong headwinds;
- Resilient Aaa countries, such as the UK and the US, whose ratings are being tested but, in our view, display sufficient capacity to grow out of their debt and repair the damage;
- Vulnerable Aaa countries (Ireland and, to a lesser extent, Spain) who face equally stern challenges and whose rating will depend on their ability to rapidly regenerate their economies. Indeed, in the case of Ireland, Moody’s placed its Aaa rating on negative outlook on 29 January 2009.
Moody’s believes that there will always have to be at least one Aaa issuer — an ‘anchor’ of the rating scale, representing the most creditworthy class of issuers. In Moody’s view, governments are the ultimate Aaa bond issuers across asset classes because of their unconstrained ability to raise resources.
This new report builds on another recent Moody’s Special Comment featured on Research Recap, in which Moody’s maps government liabilities in order to assess the safety of public debt for investors.
Moody’s notes that the new report does not constitute a change in the rating or outlook for any of the issuers mentioned.
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