Fitch Ratings suggests that the US and the UK need to cut their primary budget deficits by 6-7 percentage points of GDP to be sure of maintaining their AAA sovereign debt ratings.
In a presentation to the recent HSBC AAA Issuer and Investor Summit, Fitch says that the most effective manner to minimize “confidence shocks” and the risk of financing distress is for governments to recognize the size of the fiscal challenge and set out and implement credible plans to place public finances on a sustainable path.
The horizontal axis shows the change in the primary (ie. non-interest) budget balance as a percentage of GDP that will be necessary to stabilise debt at its 2011 levels — shown on the vertical axis — given current official fiscal projections.
It is evident that several governments face significant budgetary adjustment in the order of 4pp-7pp of GDP just to stabilize the public debt ratio at the elevated levels projected for end-2011.
“In Fitch’s opinion, the credibility of fiscal consolidation plans would be greatly strengthened by commitment to save positive fiscal surprises, contingency measures in the event of negative fiscal surprises as well as explicit debt and deficit reduction targets. It is also important that sufficient detail and transparency on the key revenue and spending measures is provided so that independent commentators can subject such plans to analysis and investors can track implementation.”
The full presentation is available in AAA Sovereigns Under Pressure (Premium)
Technorati Tags: Greece, Ireland, sovereign-debt, UK sovereign debt, US sovereign debt
Standard & Poor’s today indicated that the Greek government has done enough for now to get its fiscal house in order and preserve the country’s credit rating, but at the same time the ratings agency downgraded the banking system and placed a negative outlook on several banks.
Key comments from S&P:
- We view the Greek government’s total package of deficit reduction measures as appropriate to achieve its 2010 fiscal target, given the deterioration in Greece’s growth prospects.
- We are affirming our ‘BBB+/A-2′ sovereign credit ratings on Greece and removing them from CreditWatch negative.
- The negative outlook reflects our view of the government’s ability to sustain reform momentum in the medium term.
S&P also:
- Revised its Banking Industry Country Risk Assessment (BICRA) classification and economic risk score on Greece to ‘5′ from ‘4′.
- Increased its estimate of gross problematic assets (GPAs) for the Greek banking system to 15%-30% of total credit, from 10%-20%.
- Affirmed its ‘BBB/A-2′ long- and short-term counterparty credit ratings on EFG Eurobank Ergasias S.A.(EUROB), Alpha Bank A.E.(ALPHA), and Piraeus Bank S.A.(TPEIR);
- Affirmed its ‘BBB+/A-2′ long- and short-term term counterparty credit ratings on National Bank of Greece S.A. (NBG).
- Removed the ratings on all four Greek banks from CreditWatch, where they had been placed with negative implications on Dec. 17, 2009. All outlooks are negative.
BICRA rankings summarize the strengths and weaknesses of a country’s banking system compared with those of other countries according to a scale ranging from Group 1 (the strongest) to Group 10 (the weakest). Other countries included in BICRA Group 5 with Greece are South Africa, Poland, Brazil, Malta, Kuwait, Oman, and Bahrain.
We believe that the Greek banking system’s economic risks have heightened, due to low economic growth prospects and structural weaknesses, higher vulnerability to capital outflows, and greater credit risk.
However, the banking system has coped with mounting economic challenges and remained broadly profitable, benefiting from its consolidated and modern structure and strong commercial franchises–which we view as main comparative strengths.
For details, see:
Research Update: Greece Sovereign Credit Ratings Affirmed At ‘BBB+/A-2′ And Removed From CreditWatch; Outlook Negative and
Greece BICRA/Economic Risk Score Revised To ‘5′ On Economic Risks; Bank Ratings Affirmed/Off Watch; Outlooks Negative
Technorati Tags: Alpha Bank, banks, EFG Eurobank Ergasias, Greece, National Bank of Greece, Piraeus Bank, PulseCheck, sovereign-debt
Moody’s latest Sovereign Aaa Sovereign Monitor has generated considerable interest as it details adverse scenarios in which the Aaa rating of the US and the UK could come under threat. We are pleased to offer a complimentary download.
Selected Excerpts:
The stable outlook on the Aaa ratings of the largest governments reflects the observation that the affordability of public debt is deteriorating significantly in all cases but, on current projections, not to a level that would threaten their ratings.
Moreover, all these governments maintain very high levels of finance-ability, by which we mean that they are still able to raise considerable amounts of debt without experiencing a sharp rise in their cost of funding. A rise in the cost of funding is, however, a possible, even plausible scenario as the recovery gathers pace and central banks discontinue the exceptional measures put in place during the crisis. Sensitivity analyses (provided in the country-specific pages that follow) show that this could quickly raise the debt burden of the large countries, especially those – such as the US – that will need to roll over a large proportion of their debt in coming years.
Should that be the case, the ability of governments to reverse debt dynamics (the concept we label ‘debt reversibility’) will be tested and this ability will have to be demonstrated to continue to provide support for the ratings.
As discussed on page 24, we believe that all the large Aaa governments have the capacity to raise to the challenge that they face. Those, for which we assume a lower debt reversibility, such as France, are also governments that face comparatively lesser challenges. By contrast, the United Kingdom or the United States have stretched debt affordability farther but, in our view, also have higher debt reversibility. On balance, we believe that the ratings of all large Aaa governments remain well positioned – although their ‘distance-to-downgrade’ has in all cases substantially diminished, and tail risk has widened.
The full report Aaa Sovereign Monitor March 2010 has been made available for free download to Research Recap users for 30 days by special arrangement with Moody’s, an Alacra content partner. (After 30 days the report will revert to its regular Alacra Store price of $550.00)
For additional free research reports from the Alacra Store click here
Technorati Tags: complimentary, credit-ratings, sovereign-debt, UK, US
European governments’ commercial medium- to long-term (MLT) borrowing will likely reach a historical peak at €1,446 billion in 2010, according to Standard & Poor’s Ratings Services seventh pan-European sovereign issuance survey. This is up €52 billion from the previous peak of €1,394 billion in 2009, according to the survey, which consolidates estimates of borrowing activity of all 46 rated European sovereigns in 2010.
Excerpts from S&P European Sovereign Issuance Survey Predicts Record Borrowing Of €1,446 Billion In 2010 On Large Budget Deficits (Premium)
Among the five largest European sovereign borrowers, we expect the U.K. to borrow an estimated €38 billion less than in 2009, after very high gross MLT borrowing of €257 billion in 2009. Our estimates of gross borrowing are higher by €41 billion in Germany, and by €26 billion in France, reflecting our expectation that there will be a deterioration in their public finances in 2010. We also estimate large absolute increases in MLT borrowing in Spain (€21 billion), Russia (€20
billion), Turkey (€19 billion), and The Netherlands (€13 billion).
We also believe it is likely that net MLT commercial borrowing (that is, gross debt net of maturing debt) will reach another peak in 2010 at €762 billion, up €82 billion from its 2009 level, and almost six times the level of 2007. We believe falling amortizations are the main reason for the even stronger increase in net borrowing. Short-term debt levels also remain high at 10.9%, well above their share of about 7% before the economic and financial downturn, but slightly down from 11.7% in 2009.
In our view, debt-related sovereign vulnerabilities have increased, particularly in the Eurozone, where we expect deficits and government borrowing will likely rise further to new peaks.
Changes in sovereign risk characteristics, as well as in risk perception by investors can lead to significant changes in financing costs, as experienced by a number of sovereigns over the past 18 months, Greece being the most recent example. Furthermore, because central banks are set to phase out liquidity support to the financial sector, as well as quantitative easing measures over 2010, the ensuing drop in demand for government debt could lead to rising benchmark yields. The resulting fiscal pressure from a sustained increase in financing cost could be significant in our view. We estimate that a sustained 300 basis points (bps) shift in the yield curve would by 2015 amount to extra annual interest payments of 3.9% of 2010 GDP for Greece, 2.6% for Portugal, and 2.5% for Italy and the U.K.
Technorati Tags: Europe, France, Germany, Italy, Netherlands, Portugal, Russia, sovereign-debt, Spain, turkey, UK
Big banks, except those in emerging markets, will probably destroy value over the next four years (McKinsey)
MGI: New sectors such as cleantech are too small to make a difference to economy-wide job growth.
Excellent microcosm in 7 minutes of how American homeowners got overleveraged (podcast by NPR’s Tamara Keith)
Audit Integrity Updates Investor Watchlist for Western Europe
Credit Suisse scorecard of OECD countries most likely to face government debt funding problems (via @FTAlphaville)
Social spending is up to 24% of GDP in OECD countries, driven by healthcare and elderly costs (OECD)
Technorati Tags: big banks, home-equity-loans, social spending, sovereign-debt, unemployment, western europe
Standard & Poor’s believes Spain’s weak economic growth prospects could undermine the government’s fiscal consolidation program.
In a bulletin released today S&P said that in its view “Spain’s general government deficit is likely to remain above 5% of GDP through to 2013 versus the official forecast of 3% of GDP by 2013. As a result, we expect the general government debt burden to rise above 80% of GDP by 2012. We also expect much weaker economic performance than current budgetary assumptions. There is, moreover, significant implementation risk with regard to the government’s fiscal consolidation plans, which are not yet fully specified.”
The negative outlook on the sovereign ratings, which we assigned on Dec. 9, 2009, remains in place in the absence of more aggressive and tangible actions by the authorities to tackle Spain’s economic and fiscal imbalances. Any deterioration over and above our current expectations could put further downward pressure on the ratings.
For details, see Bulletin: Economic Growth Prospects Could Undermine Spain’s Fiscal Consolidation Program (Premium)
See also Spain: Country Economic Forecast from Oxford Economics, available for complimentary download via the Alacra Store.
Technorati Tags: sovereign-debt, Spain
As Greece and other European countries struggle with managing their sovereign debt burdens, Standard & Poor’s has issued a Credit FAQ discussing its approach to issues of support For Eurozone members experiencing financial distress.
Selected excerpts:
How would Standard & Poor’s view bilateral or multilateral financial support provided to a Eurozone government?
Financial support provided by a third party to an individual EMU member country experiencing financial distress would, we expect, likely be limited, temporary, and come with strict conditions attached, with restrictions placed on the disbursement of future funds if specific measures are not implemented. We have observed from past experience of IMF programs, for example, that such third-party support is usually only a stop-gap solution, and we believe it does not eliminate sovereign credit risk.
In our opinion, a strong, well-defined, and timely policy response from the government experiencing financial distress remains the most important factor influencing sovereign creditworthiness. Third-party financial support can provide the breathing space in which to implement a policy response, but we do not believe it is a decisive factor in sovereign rating trends.
In our view, the macroeconomic policy tools and ultimate responsibility for correcting imbalances generally remain with the sovereign state. Success in this regard depends on the political willingness and ability of the individual government to implement policies consistent with stabilizing its credit standing.
Other questions addressed in the report:
Does Standard & Poor’s expect an EMU sovereign to default?
Does Standard & Poor’s expect any sovereign to leave the Eurozone in the medium term?
What does Standard & Poor’s expect the European Central Bank (ECB) might do for an EMU member state experiencing financial distress?
So what form could financial support for a member state take?
For details, see Credit FAQ: S&P Discusses Issues Of Support For Eurozone Members Experiencing Financial Distress (Premium)
Technorati Tags: Europe, Greece, sovereign-debt, Spain
Japan urgently needs to publish a credible fiscal consolidation plan, and to back this with early revenue increases, if the integrity and credibility of fiscal management are to be guaranteed.
Guest Post by Oxford Analytica
Periodic reminders of the seriousness of Japan’s debt position tend to be brushed off by the government and in the Japanese Government Bond (JGB) market. According to the Ministry of Finance, only 5.8% of JGBs in issue are held outside of Japan and the bulk of holdings are in strong, domestic institutional hands that are willing and able to absorb the high levels of debt involved.
Repayments. The overall level of interest paid by the government on its debt has remained more or less constant at 1.4 % over the past five years — one quarter of the level prevailing at the time when Japan’s bubble economy collapsed in 1991, despite a near quadrupling of the nominal amount of government debt since then. At an estimated 9.8 trillion yen (108.7 billion dollars) for fiscal 2010 (beginning April), debt repayments are lower than they were from 1985 to 1998 despite the huge increase in government debt that came after this. This is because of the low interest rate regime in Japan of the past decade, a weak economy requiring huge fiscal stimulus, adding to government indebtedness.
Policy position. All this suggests that the JGB market is willing and able to absorb public debt, even at very low nominal interest rates. However, the OECD and IMF argue that Japan needs to put its public finances on a more sustainable track and publish a plan for fiscal consolidation. The Democratic Party of Japan (DPJ)-led administration has pledged to produce such a map by May or June this year, partly in response to market concerns over the DPJ’s plans to boost social spending. However, with a key election looming in July, the DPJ will want to avoid specifying targets.
Critical factors in determining the sustainability of Japan’s debt levels are the ability to service the debt and ability of the market (in its broadest sense) to absorb it.
Beyond that, questions of debt reduction depend critically in turn on revenue and expenditure projections:
- Interest. At a projected 20.6 trillion yen for fiscal 2010, interest payments will be equal to 22% of total budget spending of 92.3 trillion yen. The amount of debt service continues to rise in absolute terms, requiring more new debt issues each year simply for servicing existing debt. Servicing of high debt levels is affordable while rates are very low, but becomes less so when rates rise.
- Absorbing debt. That two-thirds of outstanding JGBs are held by domestic financial institutions — notably the state-owned Postal Savings and Insurance entities and the Bank of Japan — is seen as a source of stability. However, while the ability to absorb JGBs appears not be in question for now, the OECD takes the view that this will no longer be the case if primary budget deficits continue and borrowing continues to rise. Even a doubling of the national consumption tax from 5% to 10%, along with cuts in public investment and in the public wage bill, are unlikely to stabilise Japan’s debt-to-GDP ratio by 2015 and see it start dropping away by the early 2020s, the OECD thinks. Moreover, the government had pledged not to raise the sales tax for four years.
- Revenues. Apart from increasing the sales tax, the government needs to broaden the tax base. It claims to have abolished already some eight of the 300 or so preferential tax measures that limit government revenues, but an estimated 60% of all registered companies in Japan pay no tax. The personal income tax threshold is high.
Technorati Tags: credit-markets, japan, Oxford-Analytica, sovereign-debt
Fitch Downgrades Greece’s Four Largest Banks to ‘BBB’; Outlook Negative
Economic conditions are much improved for both companies and countries, executives say (McKinsey Survey)
Hedge funds to invest more in distressed banking, energy, healthcare companies (Reuters Dykema survey)
Secret recording casts more doubt on claims about Avandia’s safety (NYTimes)
“Strategic defaults” may be accelerating as more people shrug aside societal pressure to meet debts if they can (FT)
Harvard’s Rogoff Sees ‘Bunch’ of Sovereign Defaults (via Bloomberg)
Alternatives to BPA containers not easy for U.S. foodmakers to find (Wash Post)
In past week, large corporations made 32 moves in cleantech (Cleantech Group)
Technorati Tags: (GSK), BPA, cleantech, GlaxoSmithKline, Greece, mortgage defaults, sovereign-debt
But a prolonged intensification of sovereign risk concerns, ushering in an era of “new austerity,” and ultimately a double-dip recession, could lead to a reversal of the rating stabilisation seen for EMEA region corporate bonds.
Investment-grade Eurozone corporates generally have a high resilience to the current volatility in government bond markets, Fitch Ratings notes in a new report, but risks outside the agency’s central rating case are rising.
Fitch believes that modestly deteriorating fundamentals have limited direct linkage for investment‐grade corporates, but indirect linkage grows as market volatility increases- Investment‐grade organic (i.e. self‐generated) corporate liquidity still strong for high‐grade eurozone corporates
- Fitch‐rated investment grade corporates in the region, other than utilities, expected to be free cash flow positive in 2010
- Utilities should be able to retain access to capital markets and bank lending
Given the intense market and media interest in Southern Europe, the agency notes Fitch-rated issuers in the Mediterranean belt have EUR35bn of refinancing this year, with a similar amount due in 2011.
Across the region as a whole, Fitch believes that most corporates retain good relationships with their banks and have demonstrated ability to access the bond markets despite rising corporate risk premia, with only a small number of lower-rated names being viewed as having constrained bond market access.
For details, see Eurozone Sovereign Pressures and Corporates: How They Interact. (Premium)
Technorati Tags: corporates, EMEA, sovereign-debt
