DM Sovereign Rating Model for Q1 2016

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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 rating agencies.


There were only 2 DM rating actions that have been recorded since our last update in October. They were both positive, and capped a year that was weighted more towards positive actions (21) than negative ones (16). However, Greece skewed the readings, accounting for 3 positive actions and 9 negative last year. Netting Greece out gives an even more positive reading on DM ratings for 2015, with 18 positive moves and 7 negative moves.

With regards to upgrades this reporting period, S&P upgraded the Netherlands one notch to AAA with a stable outlook. The move reverses the downgrade it made back in 2013, which we disagreed with. Also, Moody’s upgraded Cyprus two notches to B1 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. Notably, Norway saw its score worsen, but by not enough to threaten its AAA standing. On the other hand, the US and Finland saw their scores improve modestly but not by enough to signal an imminent rating change. We believe that the AAA countries are for the most part correctly rated at this time. We do think that S&P reinstalling the Netherlands’ AAA rating is a sign of things to come, with the US, Finland, and Austria also deserving of a return to AAA status.

Within the AA credits, both Estonia and Malta saw their implied ratings improve a notch to AA+/Aa1/AA+. This suggests rising upgrade potential to actual ratings of AA-/A1/A+ and BBB+/A3/A, respectively. On the other hand, Belgium’s implied rating fell a notch to AA/AA2/AA. This puts it close to actual ratings of AA/Aa3/AA, and suggests little upgrade potential now. Ireland’s score continues to improve. Even though its implied rating was steady at AA-/Aa3/AA-, there is growing upgrade potential to its A+/Baa1/A- ratings. Japan’s score was steady and remains just on the borderline for AA-/Aa3/AA-. As such, the case for an immediate upgrade is not that strong yet.

Within the A credits, the story was mostly positive. Both Latvia and Italy saw their implied ratings rise a notch to A/A2/A. Upgrade potential is seen for both, but is particularly strong for Italy’s BBB-/Baa2/BBB+ ratings. Slovenia’s implied rating rose a notch to A-/A3/A-, pointing to upgrade potential for its A-/Baa3/BBB+ ratings.

Within the BBB credits, the story was positive too. Spain’s score improved, but its implied rating was steady at BBB+/Baa1/BBB+. This is close to actual ratings of BBB+/Baa2/BBB+. Portugal’s implied rating rose a notch to BBB/Baa2/BBB and suggests growing upgrade potential for actual ratings of BB+/Ba1/BB+.

Within the BB credits, the implied rating for Cyprus was steady. Cyprus still faces upgrade potential, however, as its implied rating of BB/Ba2/BB is still above current ratings of BB-/B1/B+.

Within the B credits, Greece’s implied rating was steady at B/B2/B. However, its score worsened a bit and moved it closer to actual ratings of CCC+/Caa3/CCC.


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