Sovereigns facing record year for downgrades

The major rating agencies have been casting major doubts over the credit worthiness of nations. Fitch has already cut the ratings of 15 nations this year and says it is hard to overstate the impact of Brexit. The majority of the downgrades were of borrowers from the Middle East and Africa.

The main causes for the weakening in ratings have been falling Oil prices, a stronger dollar and Brexit. Brexit has already had negative implications for the UK’s rating but could increase the political uncertainty for the rest of the EU and this may see pressure on their ratings. Also, the debt level in a number of Eurozone countries is still worrying. With the EU commission announcing it will seek sanctions on Spain and Portugal over their deficits.

S&P downgraded 16 sovereigns in the first half of the year, a figure only beaten by their actions in 2011. Moody’s beats them both though, with 24 downgrades so far. This time last year they had only downgraded 10.

The list of downgrades doesn’t read like a who’s who of the World’s top economies, but there are notable names on the list. All 3 have downgraded Saudi Arabia, unsurprising, seeing as the vast majority of their government revenues come from Oil receipts. The UK has been downgraded by 2, with Moody’s placing the UK on negative watch. Brazil has been downgraded by them all and Nigeria downgraded by 2, these are both large economies that are important in their regions. Closer to home, Finland and Poland have also been downgraded.

It is easy to disregard the comments that come from agencies, especially after the criticism they faced after the financial crisis. Yet, they still play a very important role for many investors. Some investors are limited in what assets they can own based on the ratings given out by these agencies.

Despite these downgrades, many developed economies are faced with their lowest ever borrowing rates, as investors are searching for safe havens and betting on more stimulus from central banks. As much as $12 trillion worth of bonds has been negative yielding.

It is not just developed economies experiencing low rates. The search for any kind of yield has led to demand for emerging market debt. According to JPMorgan, their index of emerging market bond yields has fallen to a 2 year low of just over 5%.


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Reuters: Business News

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