Tuesday, November 10, 2009
I have previously written numerous articles documenting about sovereign credit ratings, asking whether the UK would lose its AAA rating, and pointing out that the credit rating agencies were playing games to avoid stripping the U.S., UK, Ireland and Spain of their AAA ratings.
Reuters notes today that the UK is in danger of losing its AAA rating:
Britain is most at risk among the big economies to lose its top-notch credit rating, while Japan faces a review of its rating if government debt issuance rises greatly, Fitch Ratings warned on Tuesday.
David Riley, Fitch's co-head of global sovereign ratings, told Reuters Television in an interview that Britain's AAA rating is more at risk than that of any of the four big economies with a top rating. The other AAA countries are the United States, Germany and France. His comments sent the pound down more than a cent to $1.6616.
"It's clear that the UK's ability to sustain large public fiscal deficits and a level of public debt without driving up interest rates and without putting sterling under significant pressure is much less than in the case of the U.S," he said.
"If there was another significant fiscal stimulus package in the UK, then UK rating would be at risk."
David Riley said Fitch is also concerned about France:
"We do have also some concerns in case of France ... We have seen significant deterioration in fiscal position in France. There is some pressure starting to build there."I've also asked whether the U.S. will lose its AAA rating. On October 22nd, Moody's warned that America's credit rating might be reduced if deficits are not reined in within 3-4 years:
"The AAA rating of the U.S. is not guaranteed," said Steven Hess, Moody's lead analyst for the United States said in an interview with Reuters Television. "So if they don't get the deficit down in the next 3-4 years to a sustainable level, then the rating will be in jeopardy."
Finally, Nouriel Roubini rounds up the latest rating news on China:
- Moody's upgraded China's ratings outlook to positive from stable on November 9, 2009, keeping the rating at A1 on expectations that the country's economic recovery is taking stronger hold with only modest effects on the government's finances. The agency cited possible asset price bubbles and the long-term effects of China's stimulus program as risks to its outlook. It also upgraded the ratings for seven Chinese banks, a sector that some analysts worry may be hit with a surge in non-performing loans following this year's sharp credit growth...
- In early November, James McCormack of Fitch called the Chinese property market and banks "a sovereign rating weakness" given that the property bubble posed asset quality concerns...
- S&P affirmed its A+ long-term rating on August 18, 2009. China's modest debt level, strong external asset position and economic growth potential "outweigh sizable contingent liabilities in the banking system that could materialize should an extended economic slowdown play out."
- S&P raised the rating on China's long-term government bonds to A+ in July 2008, the fifth highest grade (short-term debt was raised to A-1+, the highest level and Hong Kong was upgraded to AA+). This move brought S&P in line with Moody's and Fitch ratings of Chinese debt...
- As of October 2009, credit default swaps on Chinese debt were cheaper than those for other countries with the same credit rating, signaling that its credit rating could be upgraded. This is an improvement from 2008, and reflects China's faster economic recovery. But the rating agencies argue that the large fiscal stimulus liabilities have offset China's strengthening position elsewhere. (Bloomberg, 10/16/09)
- China's foreign debt was US$360.6 billion in June 2009, down 3.8% from the end of 2008 and much lower than its foreign exchange reserves (US$2.13 trillion at end of Q2 2009). China's total foreign debt increased US$23.9 billion in Q2 over Q1 2009. Short term debt rose 12% in Q2 to US$194.4 billion, and accounted for 53.9% China's total foreign debt stock at the end of June, up from 51.5% at the end of Q1. (Reuters, 10/13/09)...
- Reuters: Official debt-to-GDP ratio was 17.7% at end of 2008, but this may be closer to 60% once local government debt, backstopped bank loans and bad assets are included. This is still below the U.S. level and not explosive, but stimulus spending by local governments and loans from state-owned banks may push the 2009 fiscal deficit up to 10% of GDP. (7/27/09)
- Citi: Although the Reuters calculation may be true, it is not correct to compare this debt load to that of the U.S. because calculating contingent liabilities is fraught with inaccuracy. Also, Chinese government is much stronger on the assets side of the balance sheet than the U.S. Estimates of around 8% of GDP may understate the government's assets because it has significant influence over state-owned enterprises. (8/6/09)
- World Bank: ...the fiscal surplus exceeded 0.7% of GDP in 2007. (Quarterly Update, June 2008)
- Michael Pettis, Peking University: " Despite hidden spending that may show up as contingent liabilities later on, it is the banking system not external debt that is most worrisome for Chinese economic prospects as it has accumulated so much in the way of foreign currency reserves that it will have little difficulty in repaying its very limited foreign-currency external obligations." (July 2008)
Vitaliy Katsenelson argues that while China has been blowing a huge bubble in lending, the government may have enough of a surplus to pull it off - at least for a couple of years (especially given that the banks are controlled by the government).
But - at some point in the future - the bubble in bad loans will likely burst.
I will continue to follow on-the-ground China experts such as Pettis for updates.