Economics Rating agencies: aggravated the crisis ... - Berenberg

Economics

Holger Schmieding Christian Schulz Rob Wood +44 20 3207 7889 +44 20 3207 7878 +44 20 3207 7822 [email protected] [email protected] [email protected] 14 February 2014

Rating agencies: aggravated the crisis, missing the rebound? Portugal’s credit rating and sovereign yield spread 25

0 2

4 20

6 8 10

15

Average credit rating 025 (lhs)

12 14

10-year yield spread, % (rhs, inverted)

10 2008

2009

2010

16 2011

2012

2013

2014

Average credit rating from Moody’s and S&P (lhs); 0 points (=Default) to 25 points (AAA/Aaa). 16 points equate to BBB-/Baa- (investment grade). 10-year sovereign spread over German bunds, % (rhs, inverted). Source: Bloomberg, Factset

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Credit rating agencies, whose relentless downgrades had aggravated the Euro periphery bond market panic of 2010-12, have been slow to follow the markets on their way up. Rating outlooks have been raised to stable for some countries, but ratings have mostly been unchanged (see Chart). Fastreforming and politically stable Portugal is rated three notches below crisis-stricken Turkey, Indonesia and India or five notches below Russia, Thailand and South Africa. Is this justified? The Eurozone and its weakest members have made tremendous progress since the beginning of the crisis in late 2009. The crisis countries have eliminated their external deficits and slashed fiscal imbalances. Labour and product market reforms have facilitated price and wage adjustment and put them in a much better position for future growth than before the crisis. The Eurozone as a whole has created a €500bn permanent rescue fund and adopted the toughest fiscal rule book in the world. The unprecedented currency union will soon be complemented by an equally unprecedented banking union, which over time will resolve the deadly link between banks and their host sovereigns. The ECB has demonstrated its willingness to step in forcefully in emergencies, even if Germany’s constitutional court has thrown a sizeable spanner into the works. The benefits of the huge efforts are beginning to show. In the crisis countries, growth is back. Portugal’s GDP grew 1.6% yoy in Q4, faster than Germany. Unemployment rates have fallen from their peaks. Private-sector deleveraging has made great progress and the public sector will follow. Markets have acknowledged the progress. The sovereign bond yield spreads of fast-reforming countries have fallen sharply. Portugal now pays 370bp more for 10-year bonds than Germany, down from 1,400bp in January 2012 (see Chart). Will rating agencies catch up in 2014?

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Economics

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Economics

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