Though splashy mainstream media headlines read things like “Warning of U.S. Downgrade,” it is critical to point out that Fitch Ratings actually upheld the nation’s “AAA” credit rating Monday. However, the “big three” agency did note that continued ineffectiveness on the part of the U.S. Congress to break through partisanship to get things done, most importantly address a growing debt problem, could cause Fitch to move the needle by 2013. The odds of a formal downgrade were placed at just better than 50% by the firm itself, in fact.

While Fitch affirmed the U.S. sovereign credit rating, it did drop the long-term outlook to negative from stable. Fitch noted the U.S. continues to retain strong economic and credit fundamentals as well as a currency that is “the global benchmark.” It also asserted that the U.S. economic recovery likely would kick into a higher gear by early 2013 if not late next year. However, uncertainty regarding the recovery of employment levels, government spending and even effectiveness or competency of federal lawmakers are front of mind for ratings analysts at the firm:

“Fitch's revised fiscal projections envisage federal debt held by the public exceeding 90% of national income (GDP) and debt interest consuming more than 20% of tax revenues by the end of the decade and, including the debt of state and local governments, gross general government debt will reach 110% of GDP over the same period. In Fitch's opinion, such a level of government indebtedness would no longer be consistent with the U.S. retaining its 'AAA' status…The Negative Outlook reflects Fitch's declining confidence that timely fiscal measures necessary to place U.S. public finances on a sustainable path and secure the U.S. 'AAA' sovereign rating will be forthcoming following failure to agree at least $1.2 trillion of measures to cut the federal budget deficit over the next 10 years...The failure underlines the challenge of securing broad-based consensus on how to reduce the out-sized federal budget deficit."

Fitch, essentially accusing U.S. lawmakers of kicking the can down the road, also noted that automatic cuts, to be implemented if an agreement isn’t made by lawmakers charged with finding ways to reduce the debt, essentially are discretionary spending and, thus, would not be considered a “credible” move toward real debt reduction.

Brian Shappell, NACM staff writer

It appears only a matter of time now before members of the “big three” credit ratings agencies pounce on yet another economic power in the form of a credit rating cut, as problems stemming from the “PIIGS Nations” continue to grow and spread throughout Europe.

On Monday, Moody’s Investment Services put France on notice that it is endanger 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, most recently the third-largest economy on the continent (Italy). All of this could affect the new bailout fund for struggling European nations and continue to have a domino effect through the economy and credit markets.

France got a previous downgrade scare earlier in November in what was later chalked up as an “error” by Standard & Poor’s.  S&P had released notice to a group of subscribers that France’s top credit rating was to be cut but, soon after, offered a mea culpa chalking it up to a “technical error” and a reaffirmation of the nation’s top status. Still, how a full statement on a downgrade to one of the best-rated nations on the planet was readied and released could have been a mere tech glitch became fodder for intense speculation in the weeks that followed.

Still, the warnings and the premature downgrade classification, all are leading to an increasingly likely conclusion that the French will have to deal with a ratings cut in the coming days, weeks or months. And, given its importance in helping steer the stabilization of the stumbling euro situation, it could have a much more dramatic impact in real terms than did S&P’s bold downgrade of the United States this summer.

Brian Shappell, NACM staff writer

Though quieter and less market-riling than a move weeks ago by Standard & Poor’s to downgrade the United States' sovereign credit rating on debt and global economic slowdown concerns, another firm has issued a sort of cut as well to the Americans.

The U.S., along with economic powerhouses Germany and France, were among six stripped of their “positive watch” status through Coface, which annually publishes the highly-touted “Handbook of Country Risk” outlining payment and collections trends and practices. Coface noted the moves were made largely on the collateral damage of the EU- and, to a somewhat lesser extent, U.S.-economic stumbles. In all, 10 received some sort of lessened status in the update.

Coface noted that newly expected lower levels of U.S. growth through late 2011 and 2012 are “likely to result in an increase in bankruptcies, particularly for small and medium-sized companies...”

Editor's Note: For more on the Coface risk update, check out the story in the upcoming eNews, out late afternoon Thursday.

Brian Shappell, NACM staff writer

Though Moody’s Investment Services has been the most maligned of the three top, U.S.-based credit ratings agencies by the European Union in recent months, the latest moves made by Standard & Poor’s are likely to draw ire from the so-called “PIIGS Nations” and those supporting bailout efforts alike.

In downgrading the credit rating of the city of Barcelona Monday, S&P again clarified the reasons behind its deepening concerns over the key European economy of Spain, which itself received a sovereign credit rating downgrade on Oct. 14. S&P noted that despite “signs of resilience” in the Spanish economy, there are deep problems to worry about, primarily including the state of trade partners in other “PIIGS” members struggling with debt (Portugal, Ireland, Italy, Greece). The following were listed as the top reasons for the downgrade of Spain, from AA- to A-1+, as well as the “negative” outlook going forward.

• “Spain's uncertain growth prospects in light of the private sector's need to access fresh external financing to roll over high levels of external debt amid rising funding costs and a challenging external environment.
• The likelihood of a continuing deterioration in financial system asset quality as reflected in the recent revision of our Banking Industry Credit Risk Assessment score for Spain to Group 4 from Group 3.
• The incomplete state of labor market reform, which we believe contributes to structurally high unemployment and which will likely remain a drag on economic recovery.”

It’s neither the first nor, likely, the last downgrade of an EU member amid the ongoing global economic malaise and debt conundrum. However, it’s among the most notable because its economy is much larger and more critical that some of its neighbors that have struggled in such mighty fashion.

Brian Shappell, NACM staff writer

In what will surely draw the ire of member nations in the European Union, Moody’s Investment Services has moved to cut Italy’s credit rating on concern stemming partly from contagion related to other high-debt PIIGS Nations (Portugal, Ireland, Italy, Greece, Spain). Italy’s government bond ratings to A2 with a negative outlook from Aa2.

Moody’s explained the reasons beyond the downgrade as follows:
"(1) The material increase in long-term funding risks for euro area sovereigns with high levels of public debt, such as Italy, as a result of the sustained and non-cyclical erosion of confidence in the wholesale finance environment for euro sovereigns, due to the current sovereign debt crisis.
(2) The increased downside risks to economic growth due to macroeconomic structural weaknesses and a weakening global outlook.
(3) The implementation risks and time needed to achieve the government's fiscal consolidation targets to reverse the adverse trend observed in the public debt, due to economic and political uncertainties.

The downgrade reflects the weight of these growing risks relative to some positive credit attributes. These include a lack of significant imbalances in the economy or severe pressure on private financial and non-financial sector balance sheets, as well as the actions undertaken by the government over the summer. Moody's notes that the size of the rating action is largely driven by the sustained increase in the country's susceptibility to financial shocks due to a structural shift in market sentiment regarding euro-area countries with high debt burdens. A country's susceptibility to shocks is a key factor under Moody's sovereign methodology.

The negative outlook reflects ongoing economic and financial risks in Italy and in the euro area. The uncertain market environment and the risk of further deterioration in investor sentiment could constrain the country's access to the public debt markets. If such risks were to materialise and the long-term availability of external sources of liquidity support were to remain uncertain, the country's rating could transition to substantially lower rating levels.”

Three of the four BRICs Nations received positive news from various “Big Three” ratings agencies over the last two weeks, with the latest coming Monday. Meanwhile, an agency in the fourth member, with ties to the state, has reportedly been reaching out to ratings agencies in fellow BRICs nations and beyond to test the waters for creating a more powerful competitor to the three dominant and highly criticized U.S.-based ratings agencies.

On Monday, Moody’s Investment Services affirmed the rating for India’s foreign currency and local currency debt levels, while setting its credit outlook at stable. Moody’s also noted that, despite fears of some level of cyclical downturn in the nation, its economic diversity likely was strong enough to absorb the blow without significantly negative ramifications.

The Moody’s report came just days after Fitch Ratings affirmed Russia’s long-term former and local currency issuer default ratings and noted they have a positive outlook. Despite Russia’s reputation for corruption and over-dependence on few sectors (natural resources/oil production), Fitch highlighted that the nation gains balance from a strong balance sheet and improved exchange rate flexibility. Additionally, unlike Standard & Poor’s concerns noted in the weeks prior when that agency upheld Russia’s credit ratings, Fitch appeared unconcerned with upcoming Russian elections, intimating that former president Prime Minister Vladimir Putin has maintained a high level of power and return to his previous position. Thus, there should be few disruptions or significant structural reforms.

For Brazil, S&P previously (Aug. 25) heralded the newfound economic stability of Brazil by announcing it would hold the nation’s outlook in the “positive” category despite concerns of inflation and the recent regime change. S&P also held its investment and foreign-currency ratings stable, though they are considered low. It has been intimated that Brazil could see an upgrade to one or both before year’s end.

Meanwhile, each of those three nations could play a role in a sort of credit-ratings coop reportedly being considered by China-based Dagong Global Credit Rating Co. Dagong reportedly is considering enlisting the help of ratings agencies in other BRICs nations as well as some in South Korea and even Europe to create a direct competitor to the U.S.-based agencies. Each of the three has been criticized tremendously and repeatedly for its failings in ratings outlooks during the run-up to the global economic downturn as well as for some of its ratings downgrades in recent months, especially of sovereign credit ratings in European nations. The agency notably downgraded the U.S. soverign credit rating this summer during the week following S&P's now infamous decision to do so.

Brian Shappell, NACM staff writer

Upon learning that Fitch Ratings would be unveiling its decision on the United States’ credit ratings this morning shortly after 9 a.m. (EST), there likely was significant hand-wringing and pause before markets and analysts began to read the agency’s verdict. In a bit of relief for those concerned of more economic volatility both domestically and worldwide, Fitch upheld the United State’s top-level credit rating as well as its “stable” outlook.

Fitch affirmed the U.S. long-term foreign and local currency issuer default ratings as well as the U.S. Treasury security ratings and the U.S. Country Ceiling all at the top, “AAA level.” Though noting debt has caused the U.S. fiscal profile to “deteriorate sharply,” Fitch still rates the nation among the most reliable in the world from a credit standpoint:

“The affirmation of the U.S. ‘AAA’ sovereign rating reflects the facts that the key pillars of the U.S.’ exceptional creditworthiness remains intact: its pivotal role in the global financial system and the flexible, diversified and wealthy economy that provides its revenue base. Monetary and exchange rate flexibility further enhances the capacity of the economy to absorb and adjust to ‘shocks’…U.S. sovereign liabilities, both the dollar and Treasury securities, remain the global benchmark and, accordingly, the U.S. credit profile benefits from unparalleled financing flexibility and enhanced debt tolerance.”

Last week, Standard & Poor’s stripped the United States of its prestigious “AAA” 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.  S&P lowered its long-term sovereign credit rating for the United States from the top level to AA+, with its short-term rating being affirmed at A-1+. Additionally, the outlook on the long-term rating was set at “negative” by S&P, which hit hard at federal lawmakers over the political theatrics associated with the debt-ceiling debate. Some experts, including NACM Economist Chris Kuehl, intimated the move feeds in to the view that S&P at times uses its ratings to influence nations’ monetary behavior or even punish them for not following their advice.

Speaking on the Fitch Rating, the Conference Board Economist Ken Goldstein told NACM that it, “underlines the point that S&P was making a statement more than assessment. And the question intensifies about whether they were making a statement about government finances or the agency’s ability to assess risk, in the wake of the mortgage debt debacle. It seems from some accounts that they took the GOP to task over resisting increasing revenues. If that is true, one wonders why that hasn’t gotten more play in the [mainstream] press.”

Brian Shappell, NACM staff writer

Few outside of Washington appeared to believe the partisan game of chicken being played by Congress and the White House over the debt ceiling issue was a necessity, but it at least didn’t seem to do any real damage. That was until the weekend, when Standard & Poor’s stripped the United States of its prestigious AAA 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.

S&P lowered its long-term sovereign credit rating for the United States from the top level to AA+, with its short-term rating being affirmed at A-1+. Additionally, the outlook on the long-term rating is viewed as “negative” by S&P, which hit hard at federal lawmakers over the political theatrics associated with the debt-ceiling debate an increasing number of analysts are characterizing as an unnecessary, manufactured controversy.

“We lowered our long-term rating on the U.S. because we believed the prolonged controversy over raising the statutory debt ceiling and the related fiscal policy debate indicate that further near-term progress containing the growth in public spending, especially on entitlements, or on reaching an agreement on raising revenues is less likely than we previously assumed and will remain a contentious and fitful process…The political brinksmanship of recent months highlights what we see as America’s governance and policymaking becoming less stable, less effective and less predictable,” said S&P in a statement.

The agency continued its bashing in an uncharacteristically long eight-page report explaining the rating downgrade saying the agency was “pessimistic about the capacity of Congress and the Administration” to govern properly during a challenging economic period. S&P also noted it was wary of the current crop of lawmakers effectively tacking structural debt issues or a needed lift to the spirit of bipartisan cooperation before the 2012 presidential election.

Brian Shappell, NACM staff writer

The rhetoric among U.S. lawmakers regarding the debt ceiling issue is as intense as anything heard in recent memory, as all sides are trying to put as much drama into this debate as humanly possible. The problem is that nobody really knows exactly what will happen if the debt ceiling agreement is not reached by August 2, as this is unprecedented. The reactions will be hard to predict, and there will be lots of choices to be made should the debt limit prohibit the U.S. from issuing any more securities as a means to pay its obligations.

In reality, the US will have much of what it needs financially regardless of the decisions on the debt ceiling over the next several weeks. Then it becomes a matter of setting priorities. Much has been made of what happens should the U.S. default on its debt obligations to those holding securities, but it is nearly certain that these obligations will be paid first. The most likely decision will be to delay payments to those doing business with the government. All contractors will be at risk—and for an extended period of time.

Much has been made of the reaction expected from the investment community but, in truth, there have been mixed signals. The bond yield would have been expected to rise sharply if the market thought that a real default was imminent, but it has remained stable until very recently. Even the recent increase has been modest. The assumption on the part of the bond market is that the U.S. is going to make sure that investors are paid and its credit rating will be preserved. There is always the chance that confidence will slip and the bond yields will spike, but, thus far, this is not taking place.

If the bond market doesn’t react, the interest rates will not spike. The US may yet see its sovereign credit rating downgraded [as threatened most recently by “big three” ratings agency Standard & Poor’s] though, and that could have an impact. Much will depend on what the ratings agencies think about US intentions. At the moment, they are reacting to the rhetoric in the U.S. and have to figure in a default. But, as soon as the U.S. shows its desire to pay creditors the ratings groups will likely leave the rating unscathed—but with all manner of strict warnings.

But here are threats that go beyond the debt ratings though, and these constitute a bigger risk but one that is even more unpredictable. Many who assert that the economy is too fragile for this kind of hit for thousands of businesses and individuals. The bottom line is that nobody really knows what the impact of the shutdown might be, but nobody assumes it will be benign.

Source: Armada Corporate Intelligence

Following a deal struck between stable European Union powers Germany and France, Greece is going to get their second bailout so that they have a little more time to see if the European recovery will become robust enough to save them. The foot-dragging by the Germans and the European Central Bank (ECP) finally ended for a while, and a compromise was worked that is better than inertia though it really doesn’t satisfy anymore.

Still, the deal is a significant one in a lot of respects. The “selective (temporary) default” is the first time there has been a default of any kind on Eurobonds, and that is somewhat likely to weaken this market, as well as the sovereign credit rating of neighboring nations, for a long time. The Europeans have also now committed to an open-ended rescue of Greece, meaning taxpayers in the other EU nations could be fronting the Greeks for years. These latest loans will not be the last. The real work starts now for Greece, the worst off of the debt-hobbled "PIIGS nations," as these loans only stave off the inevitable unless something changes to make Greece competitive.

The global markets were expecting that a deal would be reached, as they could not conceive of the Germans presiding over the destruction of the euro zone. But in the current political climate, nothing is certain and the markets have been wavering for weeks. Yesterday, there was a sigh of some relief, and the response was robust. Now global markets are waiting for the other shoe to drop. Will U.S. lawmakers pull the fat out of the fire at the last minute and make a deal on the critical debt ceiling issue? Most think one is imminent, but there are still some very substantial obstacles in the form of political leaders that are ready to fall on the sword over the issue of the debt and deficit.

Source: Armada Corporate Intelligence.

Despite meeting all of its austerity targets to date, Ireland saw its credit rating cut to junk as part of what appears to be Moody’s Investors Service’s summer of slashing.

Moody’s downgraded Ireland’s foreign- and local government bond ratings to the undesirable level of “Ba1” and stressed the nation’s outlook continues to be “negative.” Fueling the decision to cut the rate is Moody’s belief that the nation will need further assistance from the European Union and International Monetary Fund after the present aid program runs its course in 2013. 

“The prospect of any form of private sector participation in debt relief is negative for holders of distressed sovereign debt,” Moody’s statement noted. “Although Moody's acknowledges that Ireland has shown a strong commitment to fiscal consolidation and has, to date, delivered on its programme [sic] objectives, the rating agency nevertheless notes that implementation risks remain significant, particularly in light of the continued weakness in the Irish economy. The negative outlook on the ratings of the government of Ireland reflects these significant implementation risks to the country's deficit reduction plan as well as the shift in tone among EU governments towards the conditions under which support to distressed euro area sovereigns will be made available.”

Brian Shappell, NACM staff writer

One of the so-called Big Three ratings agencies took time out of what has been a busy year of finger-wagging at the United States and several European nations over debts levels it remains uncomfortable with to give another upgrade to one of the world’s most noted emerging economies. And despite fears of inflationary pressure and widespread hints of a forming credit bubble, the outlook for Brazil looks “positive.”

Moody’s Investors Service upgraded the government bond ratings of Brazil, to Baa2 from Baa3, as well as the nation’s foreign currency ceilings. It also gave the nation a “positive” ratings outlook.

Moody’s noted Brazil presently carries strong fundamentals that are no more than moderately susceptible to financial event risk (such as the aforementioned credit boom similar to the one that eventually leveled the U.S. economy), has a perceived willingness from officials “to reverse expansionary policies and adopt a conservative policy stance” and demonstrates declining government debt ratios. 

“High economic strength stems from large and relatively diversified productive and export bases,” according to Monday’s announcement. “Policy continuity as well as a government debt structure associated with moderate exchange rate, rollover and interest risks are integral elements of Brazil's sovereign credit profile. Prospective elements are encouraging. Our baseline expectation is for relatively favorable and more sustained economic growth in coming years.”

Brian Shappell, NACM staff writer

A bailout agreement between debt-riddled Portugal and the European Union/International Monetary Fund appears to be complete with just one more hurdle to clear. And it appears to have come just in time to prevent a default.

Reports out of Europe Wednesday indicate the Portugal bailout will be valued at 78 billion euro/$116 billion (USD). All parties actively were pressing opposition leaders, primarily from the Social Democrats party, for an agreement ahead of the official announcement. The bailout would require a host of Portuguese austerity measures highlighted by the following: an increase taxes in areas including those in the property category, a freeze on the levels of many existing benefits and public sector wages/pensions, barring of spending on new construction projects like the Lisbon airport and Liston-Porto high-speed rail link and tighter cuts, perhaps even potentially significant cuts to, education, health and housing.

The bailout marks the third of the so-called “PIIGS” nations (Portugal, Italy, Ireland, Greece, Spain) to accept financial assistance in less than one year amid crushing debt loads. Additionally, Portugal saw its sovereign credit rating plummet just five week ago as Standard & Poor’s noted that the bailouts pre-conditions almost surely would require a restructuring of debts and that all senior unsecured government debt would be subordinated to the EU’s European Stability Mechanism.

Freddy van den Spiegel, chief economist and director of public affairs for BNP Paribas Fortis, told NACM that Portugal’s bailout is a short-run positive in the sense that it restores some confidence in the EU and the euro currency. However, the economist noted that deep, existing problems are far from resolved and will remain a steep challenge for the Iberian nation in the coming years.

Brian Shappell, NACM staff writer

Reeling from debt and its workers' demonstrations against austerity measures forced by the European Union and International Monetary Fund, Greece took another proverbial shot to the jaw this week as one of the "Big Three" credit ratings agencies dealt a massive, three-level credit rating downgrade.

Moody's Investors Service downgraded Greece's government bond ratings to a level of Ba1, which is considered junk. Moody's also hit the city of Athens with a similar downgrade, noting that reliance on central government transfers to pay for operations and capital investments makes it and other sizable Greek municipalities "unlikely to possess sufficient financial flexibility to enable their credit quality to be stronger than that of the sovereign."

Moody's, who again came under attack from Greek officials over the move, defended the downgrade decision citing three reasons:

1.) The fiscal consolidation measures and structural reforms that are needed to stabilize the country's debt metrics remain very ambitious and are subject to significant implementation risks.
2.) The country continues to face considerable difficulties with revenue collection.
3.) There is a risk that conditions attached to continuing support from official sources after 2013.

"Moody's recognizes [sic] the very significant progress that Greece has made in implementing a large fiscal consolidation and introducing the legislation required to support a wide-ranging structural reform programme [sic]," the ratings agency said in a statement. "However, Moody's believes that the Greek government still faces a very significant challenge in its continued execution of the measures required to both increase revenue and achieve efficiency savings as part of the austerity programme [sic]. Whether relating to improvements in the operating efficiency of state-operated enterprises, to the savings required in the health service or in military expenditure, or to the implementation of deregulation measures passed by parliament; the task facing officials and managers remains enormous."

The ratings agency, considering the outlook on Greece "negative," now places the likelihood of a Greek government default at upwards of 20% within the next five years. It has been widely reported that ratings agency Standard & Poor's is keeping close watch on Greece's present meetings with fellow euro zone member nations over its debt and solutions to address it. It remains possible, if not downright likely, that a similar ratings downgrade could be on the way from that agency, which already values Greek debt at junk levels and its credit rating as poor.

Greek officials, who have regularly bashed the ratings agencies for their own poor track record of ratings in the run-up to the global economic downturn as well as what it perceives as obvious conflicts of interests in their decision-making, again responded to Moody's with vitriol. They've characterized the latest downgrade as "incomprehensible" and "unjustified," much like they did during downgrades that preceded Greece's acceptance of a bailout package rife with unpopular austerity demands in 2010.

Brian Shappell, NACM staff writer