(Update 2)  The U.S. government confirmed what started as widespread speculation from media sources and eventually the defendant, itself, late Monday by filing a lawsuit against one of the "big three" credit ratings agencies.

Just weeks after the European Union voted on measures essentially designed to censor overly-negative analysis, true or not, by the agencies, the U.S. federal government is taking aim, but going after just one of them. Coincidentally (or perhaps not at all), the target is the only of the three agencies to have downgraded the United States’ prized “AAA” credit rating.

Standard & Poor’s, and later the federal government, each confirmed Monday that the U.S. Department of Justice filed suit against the firm in civil court. S&P is being targeted for poor ratings/analytical performance, like others, in the run-up to the 2007 housing collapse that played a role in the eventual downturn, both domestically and internationally. S&P was also accused by some experts of having commercial incentives and an interest in padding the ratings in a positive way because some of the products and services it either sold directly or from which it benefitted.

S&P vehemently denied wrongdoing in a statement Monday and noted that the “failure of virtually everyone” in predicting the full magnitude of the eventual housing downturn. It is worth noting that in August 2011, S&P downgraded the American sovereign credit rating on what it described as unease with a political “brinksmanship” that shook its confidence in the nation’s ability to deal with its large debt with the highest level of proper or efficient manner. It also characterized policymaking among current lawmakers as “less stable, less effective and less predictable” than in the past, which clearly did not sit well at the time and since with members of Congress.  

It’s the latest shot against S&P from sovereignties unhappy with its ratings. The last one, however, involved Moody’s Investment Services and Fitch Ratings as well. EU leaders voted to approve legislation last month that restricts the timetable in which any of the three agencies could release news of sovereign credit ratings related to any member nation in Europe. The regulations would also empower investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of “gross negligence” or malpractice on the agencies' parts. Statements all but confirmed the leadership collectively was angry at the ratings agencies for lowering the ratings or warning of those with massive and escalating debt problems as well as its desire to “reduce the reliance,” if not importance, of the agencies on the global stage.

-Brian Shappell, CBA, NACM staff writer
 

Following through on a strategy that slaps of the “killing the messenger” adage, European Union member nations are slated to vote this week on restrictions to U.S.-based credit ratings agencies.

EU members are widely expected to approve legislation that restricts the timetable in which any of the three—Moody's Investors Service, Standard & Poor's and Fitch Ratings—could release news of sovereign credit ratings of any EU member. The regulations would also empower investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of gross negligence or malpractice on the agencies' part.

The EU has admitted that’s part of the purpose is designed to “reduce the reliance of ratings agencies” and a direct response to downgrades of its member nations – which were, in fact, struggling mightily with debt loads, sometimes dangerously so. 

“When nine euro zone countries were downgraded by Standard & Poor's in January 2012, it led markets to speculate on the break-up of the euro zone,” an EU statement release noted. “Agencies would need to explain the key factors underlying their ratings and refrain from making any direct or explicit recommendations on countries' policies. In addition, they would not be able to issue explicit recommendations on member states' policies.”

Many market-watchers have been wary of the move, characterizing as an extreme reaction to a situation. Ed Altman, PhD., the Max L. Heine Professor of Finance at the NYU Stern School of Business, the director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions and creator of the “Z-Score” bankruptcy predictor, called it a form of censorship. Altman, who will be speaking at the 2013 Credit Congress in Las Vegas, said the move was “an unfortunate precedent” and “totally unnecessary.”

-Brian Shappell, CBA, NACM staff writer

Perhaps the most covered story internationally this year has been about the debt struggles throughout the European Union and its impact on the rest of the world. But, for this week anyway, there was a much different and positive tone to coverage about the European sovereigns, especially in Greece and Germany.

Perhaps the most shocking of all came as one of the oft-maligned U.S.-based credit ratings agencies raised the credit profile of one of the euro zone’s most troubled nations. Standard & Poor’s raised Greece’s sovereign credit rating by six steps to a “B-minus” and also placed it in a “stable” outlook category. It’s a massive change for a nation that had been miles below an “investment grade” rating and one that has struggled with a negative outlook by the agency for years. In fact, the rating is the highest Greece has been given since early 2011.

S&P justified the improved rating by noting a deeper commitment and greater transparency therein on the part of EU member nations carried by a Germany that had dragged its feet for some time with calls for increased austerity and related concessions to avert risk. Meanwhile, economic news in Germany turned positive after some recent months of pessimistic attitudes that surprised the fiscal and production powerhouse.  

Germany’s business confidence, which sunk to its lowest level since early 2010 in October, increased for the second time in as many months in December, and did so by more than was forecast. Germany also experienced a noticeable bump in exports and new factory orders, as domestic companies involved in trade have found more opportunities for partnerships outside of an EU it had relied upon so heavily at one time.

-Brian Shappell, CBA, NACM staff writer

The European Union, continuing to struggle with a debt crisis among many of its members, had a busy if not surprising week of action. In a move that smacked of killing-the-messenger, the EU put significant restrictions on how, what and when the three biggest ratings agencies in the world could publicly assess the sovereign credit ratings of its member nations.

The EU's head-turner came in the official form of a reprimand against the “Big Three” ratings agencies (Moody’s Investors Service, Standard & Poor’s and Fitch Ratings), all of which are based in the United States. The EU is fast-tracking legislation that restricts the timetable in which any of them could release news of sovereign credit ratings of any EU member. The regulations would also empower investors with the right to take legal action against the agencies if financial losses could be tied back to vague measures of “gross negligence” or “malpractice” on the agencies’ part. Some call the move an attempt at improved transparency and competence, while others liken it to censorship.

The three credit ratings agencies were criticized heavily for their performance in ratings of both companies and countries during the run-up to the worst global recession in more than half a century. In addition, European leaders continued criticism as the agencies routinely lowered ratings of and put on warning high-debt nations including all of the PIIGS (Portugal, Ireland, Italy, Greece, and Spain)—all of which since proved to have deep-rooted fiscal issues, mind you—and, more recently, former economic powerhouse France, which saw its prestigious “Aaa” rating downgraded a step by both S&P and Moody’s in 2012. EU officials allege the timing and content of such downgrades unnecessarily exacerbated problems and have made recovery significantly more difficult.

- Brian Shappell, CBA, NACM staff writer

Three of the world’s most important and, in the past, strongest economies -- Spain, United Kingdom, Japan -- continue to deal with various kinds of threats to their economic stability as all were reminded this week.

The headline-grabber of the bunch is Spain newly escalated bond and banking concerns as its credit rating was lowered to a level just above “junk” by one of the big-three, U.S.-based ratings agencies. Standard & Poor’s (S&P) hit the economically wobbling nation, long a European Union top four economy, with a downgrade of its long-term sovereign credit rating to 'BBB-' from 'BBB+'. It’s not a surprise given Spain’s struggles – deepening recession, rising unemployment and social discontent, banking capitalization levels, credit availability and, “the lack of a clear direction in euro zone policy.”

It would be an exaggeration to say conditions are as grim in the U.K., but it took a shot of its on this week when its Office for National Statistics (ONS) noted that its trade gap more than doubled to a level of £4.2 billion in August from the previous month. That marks the second-largest trade deficit since the U.K. started tracking such measures. But, unlike so many reports of the recent past, the ONS is not hanging its problems primarily n the struggles in the European Union. Rather, ONS noted that a global drop in demand for products manufactured in the U.K. While different, that’s far from comforting.

Meanwhile, the International Monetary Fund (IMF) reminded that the surprisingly strong economic performance of the last year in Japan has been more smoke-and-mirrors than substance. IMF noted that growth has been almost entirely tied to disaster rebuilding, which it believes almost sure to cease soon. There’s also the increasing problem of an overly strong yen, a drag on trade there, because of flight from investors away from the euro.

In addition, some at the IMF believe the escalation of government bond holdings on the part of banks in Japan could prove dangerous in regards to interest rates and inflation should there be another aggressive downturn there, a scenario that would be far from shocking.

-Brian Shappell, CBA, NACM staff writer

Rarely has a warning from a ratings agency been so thinly veiled as Tuesday’s message from Moody’s Investors Service.

In its “Update of the Outlook for the U.S. Government Debt Rating,” Moody’s noted the United States’ coveted “Aaa” sovereign credit rating, now in a “negative” outlook category, might take a hit and see a downgrade if increasingly partisan lawmakers continue their failings to work together on budget and debt issues. among others.

“Budget negotiations during the 2013 Congressional legislative session will likely determine the direction of the U.S. government's Aaa rating and negative outlook,” said the Moody’s report. “If those negotiations lead to specific policies that produce a stabilization and, then, downward trend in the ratio of federal debt to GDP over the medium term, the rating will likely be affirmed and the outlook returned to stable. If those negotiations fail to produce such policies, however, Moody's would expect to lower the rating, probably to Aa1.”

Moody’s added the U.S. is unlikely to keep a “Aaa” rating if it can’t convince the agency with its actions to change its “negative” outlook setting. 

During an FCIB members-only teleconference this week with FCIA Vice President/International Economist Byron Shoulton, he noted that getting Democrats and Republicans to work together was of paramount importance.

“(Last year’s) downgrade, while controversial, was a necessary signal that needed to be sent,” he told FCIB members. “Until opposing political ideology accept that compromise is a must, recovery will be difficult in the U.S.” He added that the political gridlock and gamesmanship is having a negative impact on everything from bank lending to consumer and business confidence. He suggested that whomever wins the November presidential election would be well served to extend the olive branch to the other party in a hurry.

“Whoever wins the election is going to have to pull out all the stops for financial growth,” he urged.

-Brian Shappell, CBA, NACM staff writer

(Note: For more information on FCIB membership and to gain information on a replay of Shouton's economic outlook, visit www.fcibglobal.com).

Moody’s Investment Services decided this week to maintain the negative outlook for U.S.-based banking institutions on concerns of high unemployment, lackluster growth and inflation-goading low interest rates. Granted, Moody’s did note that banks were strengthening a little compared with a couple of years ago and that the negative American outlook was more because of its key trade partners in the European Union than its own systematic problems.

The negative outlook news came one day after Moody’s dropped its outlook for the European Union long-term rating from stable to negative after the same negative outlook was hung on Germany, France, the Netherlands and the United Kingdom, respectively, in previous weeks and months. The four come a few points shy of comprising half of all EU budget revenue. Moody’s voiced concerns about defaults on loans owed from other countries to members of the four previously mentioned.

Still, somehow the EU has maintained a Aaa rating with Moody’s, to some surprise. Granted, many continue to suggest that Moody’s ratings should be taken with a grain of salt. Earlier this year, Ed Altman, PhD, professor of finance at New York University’s Stern School of Business and creator of the Z-Score bankruptcy prediction metric, had called some of Moody’s sovereign ratings an embarrassment. “Spain and Italy are still ‘A3’ from Moody’s and similar from S&P, but we all know these countries absolutely are no longer A-ratings credits,” he said during NACM’s Credit Congress in June, weeks before those ratings dropped.

- Brian Shappell, CBA, NACM staff writer

Moody’s Investment Services has taken heat over not acting quickly enough of ratings changes from a host of commentators, including Z-Score creator/Credit Congress speaker Ed Altman, PhD, as recently as this Spring (Eg: Spain maintaining a Aaa rating through early June). However, the ratings agency took the lead in putting two of the strongest nations in a struggling European Union on its version of a watch list.  

Usually, it’s actual downgrades to sovereign credit ratings that make news where the so-called “Big Three” ratings agencies are concerned, but Tuesday brought headlines to Moody’s simply for its decision to move both economic titan Germany as well as the Netherlands from a stable outlook to a negative one. Granted, neither of the duo nor Luxembourg, which received the same reclassification this week by Moody’s, are being faulted themselves for the growing concerns. Moody’s biggest concerns centered on “the rising uncertainty regarding the outcome of the euro area debt crisis given the current policy framework and the increased susceptibility to event-risk stemming from the increased likelihood of Greece's exit from the euro area, including the broader impact that such an event would have on euro area members, particularly Spain and Italy.”

“Even if such an event is avoided, there is an increasing likelihood that greater collective support for other euro area sovereigns, most notably Spain and Italy, will be required,” Moody’s noted in its statement. “Given the greater ability to absorb the costs associated with this support, this burden will likely fall most heavily on more highly rated member states if the euro area is to be preserved in its current form.”
Despite the warning, all three remain at the “Aaa” level with Moody’s.

-Brian Shappell, CBA, NACM staff writer

In one of the most anticipated Credit Congress sessions in years, renowned New York University Professor Ed Altman, PhD, noted that his interest in sovereign activity has been percolating in recent years, especially with the struggles happening in Europe. Altman, who invented the vaunted Z-Score bankruptcy/insolvency predictive metrics system, noted that with Greece a virtual lock to default and with Spain getting more likely to do so by the day, it might eventually be the performance of Italy that decides whether on not the European Union's common currency can withstand crisis and continue on.

 

“The bottom line on Europe is that the hero or villain is going to be Italy,” Altman, the Max L. Heine Professor of Finance at the NYU Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions, told a large educational breakout session Wednesday. “Spain may be is too big to fail, but Italy is too big to save.”

 

Among things Italy has in the positive or hero side is the new government that Altman characterizes as “more enlightened.“ And, unlike its Spanish counterpart, Italy has exportable, brand-name products and services to help the economy grow as opposed to relying on things like tourism and internal real estate. Working against it is that Italy has third largest sovereign debt (2 trillion euro) in the world. Additionally, it has traditions – and not particularly productive ones – from a business standpoint that are hard to break. And, now, the interest rate on 10-year bonds is above 6%, which is thought by many to be unsustainable.

 

Altman predicted the chances are of Italy making it through and being the euro hero are about 50-50. Unfortunately, his take on that topic was a 70-30 probability just one year ago. The potential carryover damage, primarily coming from Spain's banking sector, has moved the needle in a negative direction.

 

“They now have a better government and seem to know what they need to do,” said Altman, who recently launched a Z-Score-Plus Smart Phone app which now includes predictive measures for public European Union companies. “The question is whether they have the will to do it.”

 

-Brian Shappell, CBA, NACM staff writer

 

(Note: Altman's Z-Score-Plus smart phone app is available to NACM members and Credit Congress attendees at a discount).

(Press Release) Standard & Poor's Ratings Services today said it affirmed its 'AA+'
long-term and 'A-1+' short-term unsolicited sovereign credit ratings on the United
States of America. The outlook on the long-term rating remains negative. The
transfer and convertibility (T&C)assessment of the U.S. is 'AAA'. Our T&C
assessment reflects the likelihood of official interference in the ability of
U.S.-based public- and private-sector issuers to secure foreign exchange for debt
service.

Our sovereign credit ratings on the U.S. primarily reflect our view of the
strengths of the U.S. economy and monetary system, as well as the U.S.
dollar's status as the world's key reserve currency. The ratings also take
into account the high level of U.S. external debt net of liquid assets; our
view of the recent decline--albeit from a high level--in the effectiveness,
stability, and predictability of U.S. policymaking and political institutions;
and the weakness of recent and expected U.S. fiscal performance.

We see the U.S. economy as highly
diversified and market-oriented, with an adaptable and resilient economic
structure, all of which contribute to strong credit quality...We view U.S.
governmental institutions (including the [Obama] Administration and
Congress) and policymaking as generally strong, although the ability to
implement reforms has weakened in recent years because of a sometimes slow and
complex decision-making process, particularly with regard to broad fiscal
policy direction. In particular, we think that recent shifts in the ideologies
of the two major political parties in the U.S. could raise uncertainties about
the government's ability and willingness to sustain public finances
consistently over the long term. We believe that political polarization has
increased in recent years...

Although the 2012 elections could resolve the U.S. fiscal debate, we see this
outcome as unlikely. If, as commentators currently expect, the election is
close, the race could, in our view, reduce bipartisanship from its already low
level as each side strives to rally support by more clearly distinguishing
itself from the other.

Source: S&P

As noted in this week’s eNews, among many media outlets, the European Union debt and financial crisis is teetering on spinning out of control. The Spanish banking struggles are the latest piece appearing close to a fall, and represents much more that the proverbial pawn, in comparison, that was the well-publicized Greek problems.

New York University Professor and 2012 Credit Congress speaker Ed Altman, PhD, told NACM this week that the entire mess could have limited, from a perspective of U.S. businesses, if credit departments had a few years ago not relied so heavily upon data from ratings agencies (Standard & Poor’s, Moody’s, Fitch) and it own interactions with a limited number customers in said countries.

“For a year and a half, I’ve been arguing the typical and traditional way to analyze the health of sovereign debt is incomplete, at best,” said Altman, the Max L. Heine Professor of Finance at the NYU Stern School of Business and director of research in credit and debt markets at the NYU Salomon Center for the Study of Financial Institutions. “It should be supplemented by a more in-depth analysis of the health of the private sector in each of the countries that are being analyzed.”

Altman, who developed the Z-Score bankruptcy predictor in 1968 and recently launched a Z-Score-Plus Smart Phone app, said running a check of public companies in the struggling European nations five years ago would have foretold some of the coming problems even as the sovereign ratings were good. Back then, Altman used the Z-score to determine that 13% of Greek companies were at least 50% likely to default. That number has spiked to upward of 25% in 2012. And fast-rising trend was also noticeable, but to a lesser extent in the rest of the “PIIGS nations:” Portugal and Italy both show that 25% of its public companies are at least 20% likely to default at present, not including financial institutions. Spain’s is much lower but, again, if factoring in financial institutions as well, no one save Greece is in worse shape than the Spanish, Altman suggested. All that gives credence to his outlook on the ratings agencies:

“Spain and Italy are still ‘A3’ from Moody’s and similar from S&P, but we all know these countries are no longer A-rating-worthy.  I’m not saying you should ignore the macro factors most people look at, but you need to look at the micro factors closely as well.”

-Brian Shappell,CBA, NACM staff writer

(Note: Altman will be speaking at the 2012 Credit Congress in Grapevine (Greater Dallas), TX next week on the topic of corporate distress prediction. Registration is still available (on-site only) as are discounts for NACM members on the new Z-Score smart phone app. For more information on the upcoming Credit Congress, visit http://creditcongress.nacm.org/).
 

In line with a March Business Credit article outlining the vast troubles facing Japan, Fitch Ratings sent a definite message that it believes the Japanese should be moving at a faster pace in addressing its growing debt concerns this week.

Concerns over Japanese debt and growth -- as noted by experts like Adolfo Laurenti, deputy chief economist at Mesirow Financial; Masaaki Kanno, of JPMorgan Security Japan Co.; and NACM Economist Chris Kuehl in Business Credit -- eased slightly as a surge in the trade surplus was recorded just before the end of March. But this week’s Fitch downgrade has put Japan back into prominence in the world media in the most dubious of ways…at least for those who still value such analysis from U.S.-based ratings agencies that have faced much criticism in recent months and years.

Fitch downgraded Japan's long-term foreign and local currency issuer default ratings to 'A+' from 'AA' and 'AA-.' They are the lowest ratings for the nation out of the big three raters, which also includes Standard & Poor’s and Moody’s Investment Services.  The firm also listed both outlooks as “negative.”
“The downgrades and negative outlooks reflect growing risks for Japan's sovereign credit profile as a result of high and rising public debt ratios," said Andrew Colquhoun, head of Asia-Pacific Sovereigns at Fitch. "The country's fiscal consolidation plan looks leisurely relative even to other fiscally-challenged, high-income countries, and implementation is subject to political risk." Fitch added that Japan's gross government debt is projected to approach 250% of GDP by early 2013, “by far” the highest of any developed economic power.  

Endemic issues Japan is facing include the following:

• One word: debt…the debt-to-GDP ratio presently exceeding 200% is nothing short of astonishing.
• The nation must figure out how to address energy needs, especially with an expected, perhaps unavoidable movement away from nuclear power, at least in the short term.
• The export sector faces massive disadvantages compared to other regional nations’ manufacturing sectors, especially China, because of Japan's overly high, even troublesome, value of its currency (the yen) as investors continue to remove money from the euro.

Brian Shappell, CBA, NACM staff writer

The struggles of nations like Greece and Portugal have been well documented as the European Union’s 2011/2012 economic downturn rages on. And, like NACM sources based in the United States, experts in economics, finance and credit management attending FCIB’s Annual International Credit & Risk Management Summit in Hamburg last week all appeared focused on one area of the map: Spain.

At the onset of the conference, Ducroire Delcredere Country and Sector Risk Coordinator Ben Deboeck expanded upon points he made previously to NACM’s eNews noting the implications of a continued downward spiral in Spain would be “catastrophic,” and far outpace the red herring that has been the Greece story.  With demand down throughout the EU, regions having vast autonomy that is hard for the Spanish capital to pull back on and unemployment surging to near 25% with youth figures exceeding 50%, things look bleak in the third most important economy on the continent.

“Spain’s banking problems pose the largest threat to public finances," he said. “It’s hard to see where robust growth should come from in the coming years.”

However, all is not lost just yet. Deboeck mentioned that, like Italy, Spain has done a good job to date meeting austerity/economic reform targets. In addition, there are examples where high-debt nations that made massive changes to policy emerged strong eventually. To wit, few save for Germany are in better shape presently than the Netherlands, a perennial debtor nation even during periods of last decade that is now in somewhat of a catbird’s seat. In addition, Germany consumerism could play a role in healing some problems.

“Greed can be good, as long as it's German consumer greed; It would spike demand for products,” Deboeck said.

Meanwhile, panelists Silvina Aldeco-Martinez, of S&P Capital IQ, and Jane Johnson, of Atradius, cautioned over analyzing big-picture, “simple” sovereign ratings without looking into things like intra-country regional happenings as well as established trade relationships. There can be low-ranked countries from a sovereign ratings standpoint that have some well-performing regions, and vice-versa.

“Between the good, you can always find a little bit of bad,” said Aldeco-Martinez. “In between the bad, you’ll find a little bit of good.”

Brian Shappell, CBA, NACM staff writer

Note: Business and credit issues stemming from global economic conditions in Spain and many other nations will be on full display at this year's Credit Congress, including a June 13 education session dubbed "An Uncertain Global Economy and Its Effect on Credit," among many others. For more information on or to register for Credit Congress, being held June 10-13 in Grapevine, TX, visit http://creditcongress.nacm.org/.


 

In Japan, the largest manufacturing bankruptcy in the nation’s history was declared this week as Elpida Memory Inc. found its liabilities in the neighborhood of $5 billion far too great to overcome without restructuring. The computer memory chip manufacturer, once a big part of a booming exporting industry dominated by Japan, has had trouble keeping up with foreign counterparts. The bulk of that competition, driven by lower costs, comes from outfits in South Korea, primarily Samsung.

Also not helping the Elpida and its contemporaries is that its chips are used for computers and laptops, not necessarily the growingly popular smart phones/devices like the iPhone/iPad and similar products. Additionally, the overvalued yen, which has become a bit of a magnate as investors leave the unstable euro, has made it harder for Japanese-based exporters to compete and threatens Japan’s long-held trade strength. As such, Japan, never known as a country where corporate bankruptcies were very likely, could be seeing its fortunes change … and not for the better (see more on this topic in a feature in the latest, March issue of Business Credit Magazine).

In Greece, the ratings agencies have struck again. This time Standard & Poor’s have downgraded Greece into the sovereign credit rating category of “SD” or selective default. Given its troubles, any action of the kind – once thought to be a virtual bomb in the markets – strikes as less than shocking. Said S&P:
“Greece's retroactive insertion of Collective Action Clauses materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring…we believe that the retroactive insertion of CACs will diminish bondholders' bargaining power in an upcoming debt exchange.”

In Ireland, a potential snag in the latest European Union effort to force the tightening of member states’ proverbial belts is emerging. Prime Minister Enda Kenny announced this week that, as per Irish constitutional mandate, a public vote must be held to ratify the proposed EU treaty that calls for tougher debt limits, limits that almost certainly will force more, unpopular austerity in the debt-rattled  nation. For his part, Kenny said he plans to sign the treaty as a show of support he believes, at least in part, is necessary for an ongoing economic recovery for the EU. It is worth noting the neighboring United Kingdom was one of only two members voting against the treaty, but it’s also not on the euro as its primary currency.

(Note: Check out this week’s eNews, out Thursday, for more breaking and news for credit and financial professionals. www.nacm.org).  

Brian Shappell, NACM staff writer
 

Stop us if you’ve read this before – worried about “contagion” spreading from the high-debt “PIIGS Nations,” a U.S.-based credit ratings agency has lowered the boom on the credit ratings and/or outlooks of several in said grouping as well as neighboring nations. While it may seem like a repeat, NACM assures you: it isn’t.

Moody’s Investment Services Tuesday downgraded the sovereign credit ratings of six European nations – Italy, Malta, Portugal, Slovakia, Slovenia and Spain (which fell multiple steps). Additionally, Moody’s wagged the proverbial finger at France, Austria and the United Kingdom – all holders of a prestigious ‘Aaa’ rating level – by publicly moving their respective outlooks from stable to negative.

As Moody’s and its counterparts at Fitch and Standard & Poor’s have alluded to in the past, the agency pointed to “uncertainty over the euro area’s prospects for institutional reform of its fiscal and economic framework” as well as “increasingly weak macroeconomic prospects, which threaten the implementation of domestic austerity programmes and the structural reforms that are needed to promote competitiveness.” Because of both – and, one could argue, because of the agency’s own increasing spotlight/scrutiny on debts levels in the EU – Moody’s fears the impact on market confidence and the negative cycle that could ensue.

Markets fell slightly on the news, though the announcement generated more of a yawn than the panic and/or debate such a move would have in years past. Economists, including NACM’s Chris Kuehl and The Conference Board’s Ken Goldstein, have made past comments to the tunes of “it didn’t tell markets anything they didn’t already know” or slights on the ratings agency’s own crisis in credibility it suffered after poor analysis and borderline conflicts of interest in business practices during the much discussed run-up to the global economic downturn a few years back. Still, even with less of a cache, the downgrades are likely to have some negative impact on the short-term credit prospects for the nations involved, even if the extent is yet to be established.

Brian Shappell, NACM staff writer.

The following are passages released by Fitch Ratings regarding its six-nation credit downgrade timed with the end of the U.S. business day Friday:

"Fitch Ratings has today concluded its review of the six eurozone sovereigns it placed on Rating Watch Negative (RWN) on 16 December 2011.

The rating actions on the long-term Issuer Default Ratings (IDRs) are as follows:

• Belgium downgraded to 'AA' from 'AA+'; Negative Outlook;
• Cyprus downgraded to 'BBB-' from 'BBB'; Negative Outlook;
• Ireland LT IDR affirmed at 'BBB+'; Negative Outlook;
• Italy LT IDR downgraded to 'A-' from 'A+'; Negative Outlook;
• Slovenia LT IDR downgraded to 'A' from 'AA-'; Negative Outlook;
• Spain LT IDR downgraded 'A' from 'AA-'; Negative Outlook;

"Today's rating actions balance the marked deterioration in the economic outlook with both the substantive policy initiatives at the national level to address macro-financial and fiscal imbalances, and the initial success of the ECB's three-year Long-Term Refinancing Operation in easing near-term sovereign and bank funding pressures. Nonetheless, the intensification of the euro zone crisis in the latter half of last year undermined the effectiveness of ECB monetary policy and highlighted the financing risks faced by eurozone sovereign governments in the absence of a credible financial firewall against contagion and self-fulfilling liquidity crises."

Source: Fitch Ratings

During what is a traditionally slow news period within the United States because of preoccupation with the holiday season, China lobbed a few thinly veiled barbs and hinted at challenges they would mount both in use of currency and U.S.-based credit ratings agencies.

Chinese banking official Zhou Xiaochuan announced that China, unsatisfied with the quality and accuracy of ratings coming out of the dominant U.S.-based credit ratings agencies (Moody’s Investment Services, Standard & Poor’s, Fitch Ratings) was seriously considering launching its own ratings agency. Additionally, he encouraged China’s largest financial institutions to consider launching their own competitors to the U.S.-based big-three or at least to add more researchers analysts to rely less on the existing services. The agencies have grown increasingly unpopular with what some characterize as trigger-happy downgrades of sovereign credit ratings of late, perceived conflicts of interest between its actual ratings and product offerings as well as its shaky performance in the lead-up to the global economic freefall.

Granted, there would be a lot of obstacles to overcome in either Chinese scenario as international trust of its government and banking system still lags far behind its status as a manufacturing hub. And that doesn’t even take into account the large cost to get anything competitive up and running to which potential clients, stuck in an ongoing tepid economic recovery, would be unlikely to pay a premium.

In a perceivably unrelated move, the Chinese and Japan announced new currency/trade partnership designed to boost both the renminbi and the yen in the area of trade, among others. Though largely symbolic and shrouded in a lack of finite details to date, the move appears to be a message that both are trying to gradually reduce reliance on the dollar as the dominant currency. While a statement not to be ignored, it’s not likely to push the Chinese currency ahead of the dollar on the world stage at any faster pace. As the Federal Reserve’s Matthew Higgins told NACM in an interview as well as attendees at FCIB’s New York International Roundtable in September, it could still take decades for the dollar to be replaced as the world’s go-to currency.

Brian Shappell, NACM staff writer

On the heels of negative press for France and the possibility of a downgrade from its top-notch credit rating, the third of the big three ratings agencies has weighed in with a favorable outlook for the European power…at least for now.

Fitch affirmed France’s long-term foreign and local currency issuer default ratings and its senior debt at “AAA” status. Additionally, its outlook was upgraded from negative to stable. From Fitch:

“The affirmation of France's 'AAA' status is underpinned by its wealthy and diversified economy, effective political, civil and social institutions and its financing flexibility reflecting its status as a large benchmark euro area sovereign issuer. In addition, the French government has adopted several measures to strengthen the creditability of its fiscal consolidation effort.” However, based on problems in other European Union nations, Fitch predicted the chance of a French credit rating downgrade within the next two years at about 50%.

Fitch wasn’t so kind to everyone in Europe on Friday as six – "PIIGS nations" members Italy, Spain and Ireland as well as Belgium, Slovenia and Cyprus – were put on a new downgrade watch on debt and growth concerns.  

In recent weeks, Moody’s Investment Services had placed France on notice that it is in danger of losing its long-held AAA sovereign credit rating on concerns that aren’t so much based on its own situation, but those of rising borrowing costs/bond yield activity tied to collateral damage from problems in other high debt European nations. It is the second time this year Moody’s has released a public warning about France, which along with Germany has been forced to carry the load for a cluster of debtor nations. Standard & Poor’s later put both France and German on warning on a day when 15 European Union members simultaneously were placed on its negative watch. The rational was over “systemic stresses in the euro zone that have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole.”

Brian Shappell, NACM staff writer

Economists seem to agree that global growth in 2012 hangs on the fate of one particular continent.

What happens in Europe will determine much of the world economy’s health, according to economists from the Wells Fargo Economics Group, and NACM Economist Chris Kuehl, PhD. Both Wells Fargo and Kuehl presented their predictions in separate teleconferences last week, and while issues with Asia, inflation and elections were also hot topics, the biggest threat to growth was the euro zone.

“It’s not a 2009 unless Europe blows up,” said Wells Fargo Global Economist Jay Bryson, PhD. “Everything is predicated on Europe not blowing up.”

Wells Fargo Chief Economist John Silvia, PhD agreed with his colleague, noting that “the primary risk to forecast will be the question on European sovereign debt, and what it entails for borrowing around the world.” Kuehl, in his FCIB teleconference, noted that the crisis has already caused a second round of tightening among European banks and businesses. “The credit crisis has begun again in Europe,” said Kuehl. “It’s not as nasty as it was in 2008, but you’re seeing a slowdown. It’s gone back to a period where no one really has a good sense of where this conversation is going to go, and probably won’t have until the middle of next year.”

How much this lingering uncertainty and possible collapse will affect the U.S., however, remains to be seen. “We don’t have a lot of exposure to Greek debt,” said Kuehl, referring to the euro zone country closest to the brink of collapse. “France is probably the most exposed when it comes to the private sector. Germany is the most exposed when it comes to the government. Once you get past Germany and France the exposure begins to deteriorate quickly and as far as the U.S. is concerned, it’s relatively small,” noted, cautioning still that, “we are exposed indirectly because U.S. institutions are tightly connected to those in France and Germany.”

This being the case, growth in the U.S. is expected to be positive, but still on the small side.  “We do expect the U.S. economy to expand by 2%,” said Silvia. “With this subpar economic level, we have modest inflation levels, and I think the Fed funds rate will stay the same until 2013.” Bryson agreed, noting that “It’s an average sort of year. Then, in 2013, we come back.”

For more information on FCIB’s international educational offerings, click here.

Jacob Barron, CICP, NACM staff writer

Despite image problems from shaky predications in the run-up to the recession, perceived conflicts of interest and a U.S. rating downgrade widely regarded as premature if not unnecessary, Standard & Poor’s has continued to not shy away from controversy with its ratings moves and warnings. But perhaps its most incendiary moment came this week when it put 15 European Union members on blast.

Just as markets were starting to have faith in the German- and French-led measure to clean up the EU’s ongoing debt and monetary problems, S&P swooped in to undue all of that positive by putting the long-term sovereign credit ratings on its negative watch list. Among those receiving the dubious distinction were Austria, Belgium, Finland, France, Germany, Luxembourg and the Netherlands. The following nations were noted as negative both in the long and short term: Estonia, Ireland, Italy, Malta, Portugal, Slovak Republic, Slovenia and Spain. S&P’s now maligned release explaining its position included the following:

“Today's CreditWatch placements are prompted by our belief that systemic stresses in the euro zone have risen in recent weeks to the extent that they now put downward pressure on the credit standing of the euro zone as a whole. We believe that these systemic stresses stem from five interrelated factors:

1. Tightening credit conditions across the euro zone;
2. Markedly higher risk premiums on a growing number of euro zone sovereigns, including some that are currently rated 'AAA';
3. Continuing disagreements among European policy makers on how to tackle the immediate market confidence crisis and, longer term, how to ensure greater economic, financial, and fiscal convergence among euro zone members;
4. High levels of government and household indebtedness across a large area of the euro zone; and
5. The rising risk of economic recession in the euro zone as a whole in 2012.

Currently, we expect output to decline next year in countries such as Spain,
Portugal and Greece, but we now assign a 40% probability of a fall in output
for the euro zone as a whole.”

S&P noted that it’s waiting to make any decisions on rating moves until after the Dec. 8-9 EU Summit, but intimate some downgrades could occur very soon after. Stay tuned…

Brian Shappell, NACM staff writer