DM Sovereign Rating Model For Q3 2020

Back in April, we warned that our own sovereign ratings model was pointing to many sovereign downgrades ahead. Indeed, Fitch’s downgrade on the UK to AA- back on March 27 was only the beginning. Since then, there have been thirteen rating moves, all negative. More are coming. Note that that the April edition focused only on the 17 major Developed Markets (DM) countries, while this edition goes back to covering the full 33 countries in our model universe.

Unsurprisingly, DM sovereign creditworthiness is falling precipitously because of the virus. Virtually all model scores worsened, with many leading to significant downgrades to the implied ratings. While the ratings agencies have already started downgrading the sovereigns, we believe more will come under significant downgrade pressures. We continue to believe that our model helps investors identify dislocations and potential divergences in the agency ratings.

As always, we are assuming that the ratings agencies have not changed their methodologies. Our own model was constructed on the long-standing metrics that help determine a country’s creditworthiness. With most countries blowing out their budget deficits and many engaging in QE, traditional debt sustainability metrics have been blurred.


There have been 13 major DM rating actions recorded since our last update in April. All have been negative, and it will only get worse.

Fitch has made the most negative moves since early April with nine. It downgraded Canada by a notch to AA+, downgraded Slovakia by a notch to A, downgraded Italy a notch to BBB-, and downgraded Hong Kong by a notch to AA-, all with stable outlooks. The outlooks for Australia’s AAA and France’s AA ratings were moved from stable to negative. Lastly, the outlooks for Austria’s AA+, Portugal’s BBB, and Malta’s A+ ratings were moved from positive to stable.

S&P has made three negative moves since April. It moved the outlooks for Japan’s A+, Greece’s BB-, and Portugal’s BBB ratings from positive to stable. Japan and Portugal appear to be correctly rated for now, but Greece should eventually be downgraded.

Lastly, Moody’s has made one negative move since April. It moved the outlook on Israel’s A1 rating from positive to stable.

Virtually all of the moves this past quarter line up with what our model would suggest. If anything, the agencies did not go far enough. Year to date, there have been seven positive moves and eighteen negative moves in DM. This means positive moves have accounted for 28% of total moves in 2020, well below the 85% share in 2019 and 89% share in 2018.


Within the AAA credits, most scores have fallen sharply across the board as the pandemic spread. Since our April update, however, the scores of three countries have improved slightly: Sweden, the Netherlands, and Germany. Whilst the stronger AAA credits (mostly northern eurozone and the Scandies) have managed to maintain their implied ratings, the drop in overall creditworthiness is nonetheless significant. Of note, Canada, Austria, and New Zealand are right on the cusp of moving into AA+ territory.

The US warrants a special comment. It had been going back and forth between AAA and AA+ for several quarters but the crisis pushed the implied rating down to AA- back in April. Its implied rating has now fallen into A territory. While we are not predicting downgrades to single-A, we do think that the significant deterioration in its credit metrics means that the US stands a strong chance of losing its Aaa and AAA ratings from Moody’s and Fitch, respectively. S&P already took its AAA rating away back in August 2011 and even that AA+ rating is at risk now even though the US gets a large pass for having the world’s reserve currency.

Within the AA credits, scores were broadly lower. Australia’s score worsened enough to push it into AA territory, suggesting heightened downgrade risks to actual ratings of AAA/Aaa/AAA. Only Hong Kong showed a slight improvement from April, but its implied rating was unchanged at AA/Aa2/AA. Estonia and Belgium both saw their implied ratings fall but this puts them both pretty much at actual ratings of AA-/A1/AA- and AA/Aa3/AA-, respectively.

Within the A credits, virtually all scores worsened. The one exception was Japan, which saw its score improve from April but not by enough to change its implied rating of A+/A1/A+, which keeps it close to actual ratings of A+A1/A. Many countries dropped down into this weaker category, including Iceland, Ireland, Malta, Israel, and Slovenia. Most of these are now close to actual ratings. Others saw their ratings drop further within this category, including France, UK, and Latvia. Of note, both the UK and France are subject to even stronger downgrade risks.

Within the BBB credits, virtually all scores deteriorated. The one exception was Spain, which saw its score improve from April and pushed its implied rating up a notch to BBB/Baa2/BBB. It still faces strong downgrade risks, however. Elsewhere, Slovakia and Portugal both worsened enough to see their implied ratings drop down from A-/A3/A- previously to BBB+/Baa1/BBB+ and BBB/Baa2/BBB, respectively. Of these two, only Slovakia is seeing strong downgrade risks.

Within the BB credits, Italy’s score worsened modestly. However, it was enough to push its implied rating down a notch further into sub-investment territory at BB/Ba2/BB. Current ratings of BBB/Baa3/BBB- are thus even more vulnerable to downgrade risk. If the agencies were to agree with our assessment, this would make Italy sub-investment grade for the first time ever.

Within the B credits, Greece’s score worsened. It was enough to push its implied rating down two notches further into sub-investment territory at B/B2/B. As such, current ratings of BB-/B1/BB remain vulnerable to downgrade risk.


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, political risk, 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.

In order to make our model forward looking, we are using the latest 2020 forecasts from the IMF. These forecasts were all plugged into our ratings model to generate likely rating movements this year.