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Tuesday, July 13, 2010

Sovereign credit ratings... according to non-Anglosaxons

Specifically, according to Chinese company Dagong Global Credit Rating.

It is not trivial, considering that Anglosaxon companies may have a bias and that China, along with other East Asian countries like Japan, is a major investor in foreign debt.

Definitively the USA, Britain and other major Western countries like France, or even Germany, are not AAA for the Chinese financial watchdog. Notably the USA is rated as merely AA in both local and foreign currency with a negative outlook.

For reference, I must remind that the rating of AAA- of Spain by Standard and Poor caused hysterical reactions from the corporations and the politicians, both locally and at EU level.

Let's see the detail (major powers in bold type)

States that get AAA rating are Norway, Denmark, Luxemburg, Switzerland and Singapore. Australia and New Zealand also get this rating in their local currencies but only AA+ in foreign denominations.

AA+ is achieved by Canada, Netherlands, Germany and China. China also gets AAA in foreign denominations.

AA rating is given to Saudi Arabia and the USA, however the superpower gets a "negative" remark on its outlook.

AA- is obtained by South Korea, Japan, Great Britain and France. Japan however gets a full AA, without the minus, for credit denominated in foreign currencies. Japan, Britain and France get a "negative outlook" remark as well.

A+ is reserved for Belgium and Chile.

A is given to South Africa, Malaysia, Russia, Estonia, Poland and Spain. Poland gets an A- in foreign currency rating. Spain is the only in this bloc with the "negative outlook" remark.

A- includes important countries like Brazil and Italy, as well as Israel and Portugal. Israel credit looks weak but as long as it can get its yearly tribute from Washington guess it'll survive. Italy and Portugal however get the "negative outlook" remark.

BBB includes India, Thailand, Mexico, UAE, Kazakhstan and Hungary. The last two with BBB- in foreign currencies. Hungary and UAE get a "negative outlook" remark.

The category BBB- for both types of bonds is reserved to Indonesia.

BB+ includes Egypt, Venezuela, Nigeria and Romania, this last with a "negative outlook" remark.

A BB ranking is obtained by Greece, Turkey and Iceland. Iceland being the only one with the "negative outlook" remark in this group.

Vietnam gets a BB-, Mongolia and Philippines a B+, Argentine and Ukraine a B, Pakistan B- with "negative outlook" and Ecuador is ranked as CCC, the lowest of all surveyed countries.

The ratings are based on a number of factors, which are fulfilled only by the AAA rated countries:

... political institutions are mature and well-functioning; national development strategies are clear and implemented vigorously with obvious effect; the national security situation is stable; economic strength is strong, and they have powerful global competitive advantage; as the world economic recovery, their growth prospects are assured; they have well-developed financial systems and strong resistance to impacts; the Government maintains a stable fiscal records in long term; although the economic crisis yields the government deficit and debt increasing, the fiscal sustainability are maintained; the internal value of currency is stable; their debts are mainly denominated in local currency, or they have good external liquidity and ample foreign exchanges; the external value of the currency is stable.
Countries rated AA are considered less stable lacking one or two of these ideal components, what makes their solvency somewhat less guaranteed. States ranked A are only strong in two or three of these elements, etc.

The report also includes a comparison with Western rating agencies that makes evident that the Chinese agency is more demanding in order to give an AAA rating but compensate that by giving more AA and A ratings. B and lower segment ratings are similar.

Dagong rates several developing countries higher than its Western equivalents. Of course, one of them is China but also includes Saudi Arabia, Russia, Brazil, India, Indonesia, Nigeria, Venezuela and Argentina. Go BRIC, go! or are the Chinese more objective when rating the developing world?

They argue that:

Dagong holds that the national management capacity of these countries continues to improve, the economic growth potential is stable in the long term, fiscal stability and the resistance capacity against external shocks are getting better increasingly. Especially after the global financial crisis, the performance of these countries prove that they are more likely to turn the disadvantage into advantage in a short time, which could ensure the increase of national credit level.
What seems to make some good sense on light of what we have seen in the news in the last years.

In turn there are 18 countries getting lower ratings by Dagong than the usual NYC-based watchdogs. Of these, more than half are developed Western countries: Canada, the USA, a large list of European states and Israel. There's also a meaningful group of developing countries (UAE, Thailand, Mexico, Romania, Philippines and Ecuador) but these only rank one level lower, while the developed countries of Europe and North America see often their credit rankings reduced by several levels.

Chinese or Western bias? Considering the panic that they are inducing through the media over here about credit issues, I'd say that Western bias looks more likely. However can you trust the media these days?

The Chinese raters argue that:

As a result of the discordance among the growth rate of government debt, the growth rate of the economic output, and that of the fiscal revenue, this group of countries can only maintain their sovereign credit level on the basis of external financing. Since the beginning of 2010, fiscal risks in these countries have not only become the biggest source of systemic risk domestically, but also possibly the main source of the risk of a double dip for the world economy.

There's also a long list of 23 states that get similar ratings by all four companies.


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