Developed Markets Sovereign Rating Model for Q4 2015

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We have produced this ratings model to assist investors in assessing relative sovereign risk over a wide range of Developed Markets (DM), 30 in all. Scores directly reflect a country’s creditworthiness and its underlying ability to service sovereign debt obligations. Each country’s score is determined through a weighted compilation of fifteen economic and political indicators, which include debt/GDP, current account/GDP, GDP growth, actual and structural budget balance, per capita GDP, banking sector strength, and inflation. These scores translate into a BBH implied rating that is meant to reflect the accepted rating methodology used by the major agencies.


There were 13 DM rating actions that have been recorded since our last update in July. They were weighted significantly more towards positive actions (9) than negative ones (4). In the previous period, 6 actions were positive and 4 were negative. For the entire year so far, there have been 19 positive moves and 16 negative. However, Greece accounted for 3 positive actions and 9 negative this year. Netting Greece out gives an even more positive reading on DM ratings for this year, with 16 positive moves and 7 negative moves.

With regards to upgrades this reporting period, S&P was the most active with 4. It upgraded Portugal one notch to BB+ with a stable outlook, and also upgraded Spain a notch to BBB+ with a stable outlook. S&P upgraded Slovakia one notch to A+ with a stable outlook, and upgraded Cyprus one notch to BB- with a positive outlook.

On the other hand, S&P provided 2 of the negative actions this period. It moved the outlook on Finland’s AA+ rating from stable to negative, and also downgraded Japan by one notch to A+ with a stable outlook.

Fitch was the next most positive this period with 3 actions. It upgraded Cyprus two notches to B+ with a positive outlook, upgraded Iceland one notch to BBB+ with a stable outlook, and upgraded Greece from CC to CCC.

Moody’s moved its outlook higher for both Ireland and Greece to positive and stable, respectively. However, Moody’s was also responsible for the other 2 negative actions this period. It moved the outlook on Austria’s Aaa rating from stable to negative, and also downgraded France one notch to Aa2 with a stable outlook.

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The stronger AAA credits (mostly the dollar bloc, the Scandies, and the northern eurozone) easily maintained their position this round. For this group, model scores were generally flat or improved, though notably, Canada, the Netherlands, and Finland saw slightly worse scores. On the other hand, the US and Luxembourg saw their scores improve the most. None moved by enough to signal an imminent rating change in either direction, and we believe all the AAA countries are correctly rated at this time.

Within the AA credits, both Belgium and Iceland saw their implied ratings improve a notch to AA+/Aa1/AA+ and AA/Aa2/AA, respectively. After introducing Malta into our model last quarter as an AA+/Aa1/AA+ credit, its implied rating fell a notch this quarter to AA/Aa2/AA. This suggests diminishing upgrade potential to actual ratings of BBB+/A3/A.

Within the A credits, the story was mixed. Both Japan and Ireland saw their implied ratings improve a notch to AA-/Aa3/AA-, moving them out of the A category. However, both are just on the borderline, and so the case for immediate upgrades is not that strong yet. On the other hand, both Latvia and Lithuania saw their implied ratings fall a notch to A-/A3/A-. Upgrade potential for the two has now vanished.

Within the BBB credits, the story was mixed too. Slovenia’s implied rating rose a notch to BBB+/Baa1/BBB+, and suggests diminished downgrade risk. On the other hand, Portugal’s implied rating fell a notch to BBB-/Baa3/BBB- and suggests diminished upgrade potential to actual ratings of BB+/Ba1/BB+.

Within the BB credits, the implied rating for Cyprus was steady. Cyprus faces upgrade potential, however, as its implied rating of BB/Ba2/BB is still above current ratings of B+/B3/B-. Greece’s implied rating fell two notches to B/B2/B, moving it out of the BB grouping and moving it closer to actual ratings of CCC+/Caa3/CC.


Given the different path this quarter for implied ratings, it is clear from the scores that fundamentals are taking divergent paths for many countries across the DM universe. Many are improving, but some are deteriorating. We continue to believe that our model helps to identify the winners and the losers within this divergence trend.