Introduction to Sovereign Ratings
Nikola G. Swann, CFA, FRM
Director
Sovereign Ratings
Standard & Poor’s Ratings Services
nikola_swann@standardandpoors.com
Presentation to Queen’s University, Department of Economics
Kingston, Canada
November 6th, 2012
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Copyright © 2011 Standard & Poor’s Financial Services LLC, a subsidiary of The McGraw-Hill Companies, Inc. All rights reserved.
Agenda
• Essential credit rating concepts
• Sovereign ratings landscape
• Methodological framework for S&P sovereign ratings
– Examples – Canada, U.S., U.K., France, and Germany
• Sovereign ratings stability
• Sovereign ratings performance
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2.
Credit Rating Concepts – Relative, Not Absolute
• Ratings express relative opinions about the creditworthiness of
an issuer or credit quality of an individual debt issue, from
strongest to weakest, within a universe of credit risk
• Credit ratings are not absolute measures of default probability
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3.
Sovereign Credit Rating Concepts
• Ability and willingness of the central government to meet
financial commitments in full, on time, and unconditionally
• Standard & Poor’s Ratings Services separately produces a
transfer and convertibility (T&C) assessment for each rated
sovereign
• Sovereign ratings do not measure country risk
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4.
Relative Credit Quality Distinctions
Rating
AAA
Extremely strong capacity to meet financial commitments (highest rating)
AA
Very strong capacity to meet financial commitments
A
Strong capacity to meet financial commitments, but somewhat susceptible to
adverse economic conditions and changes in circumstances
BBB
Adequate capacity to meet financial commitments, but more subject to adverse
economic conditions
BB
Less vulnerable in the near-term but faces major ongoing uncertainties to
adverse business, financial and economic conditions
B
More vulnerable to adverse business, financial and economic conditions but
currently has the capacity to meet financial commitments
CCC
Currently vulnerable and dependent on favorable business, financial and
economic conditions to meet financial commitments
CC
Currently highly vulnerable
C
Currently highly vulnerable obligations and other defined circumstances
D
Payment default on financial commitments
Source: Standard & Poor’s Ratings Services via standardandpoors.com.
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5.
Sovereign Credit Rating Landscape
Source: Standard & Poor’s Rating Services “Sovereign Defaults and Transition Data, 2011 Update” as of March 2, 2012.
SD = Selective default.
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6.
Recent Sovereign Rating Trends
Source: Standard & Poor’s Ratings Services “Sovereign Rating And Country T&C Assessment Histories ” as of October 2, 2012.
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7.
Selected Rating And Outlook Histories
Positive Outlook/CreditWatch Positive
Negative Outlook/CreditWatch Negative
Downgrade
Upgrade
As of October 30th
Rating and Outlook (end of period)
US
AA+/Negative
Canada
AAA/Stable
Australia
AAA/Stable
Singapore
AAA/Stable
Japan
AA-/Negative
Denmark
AAA/Stable
France
AA+/Negative
Germany
AAA/Stable
Greece
CCC/Negative
Ireland
BBB+/Negative
Italy
BBB+/Negative
Norway
AAA/Stable
Portugal
BB/Negative
Spain
BBB-/Negative
Sweden
AAA/Stable
Switzerland
AAA/Stable
UK
AAA/Stable
2004
2005
2006
2007
2008
Source: Standard & Poor’s Ratings Services.
All ratings shown are foreign currency, long-term, sovereign credit ratings.
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8.
2009
2010
2011
2012
through
October
Methodological Framework For S&P Sovereign Ratings
Published June 30, 2011
Source: Standard & Poor’s Ratings Services “Sovereign Government Rating Methodology And Assumptions ” as of June 30, 2011.
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
9.
Economic Score
Source: Standard & Poor’s Ratings Services “The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It” as of September 14, 2011.
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10.
Economic Score – G-5 Indicators
Real GDP growth* (%)
2010-2014f average
2011 (right scale)
GDP per capita
('000, US$)
3.0
60
2.5
50
2.0
40
1.5
30
1.0
20
0.5
10
0.0
0
Canada
U.S.
U.K.
France
*Real GDP growth is year to year.
e--Estimated. f--Forecast.
Source: Standard & Poor’s Rating Services "Sovereign Risk Indicators" as of June 27, 2012.
© Standard & Poor's 2012.
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
11.
Germany
External Score
Source: Standard & Poor’s Ratings Services “The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It” as of September 14, 2011.
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12.
External Score – G-5 External Indebtedness
Narrow net external
debt/CAR (%)
2010-2014f average
450
400
350
300
250
200
150
100
50
0
Canada
U.S.
U.K.
France
Narrow net external debt: external debt position net of liquid assets of the public and financial sectors. e--Estimated. f--Forecast.
Source: Standard & Poor's Rating Services "Sovereign Risk Indicators" as of June 27, 2012.
© Standard & Poor's 2012.
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13.
Germany
External Score – External Liquidity
Enduring Global Preference For U.S. Dollars
Currency Composition of Official Holdings of Foreign Exchange
U.S. dollar
Pound sterling
Euros
Unallocated holdings (% of identified holdings)
Japanese yen
Swiss franc
Other currencies
100
90
(% of allocated holdings)
80
70
60
50
40
30
20
10
0
1987
1989
1991
1993
1995
1997
1999
2001
2003
2005
2007
2008
All years show fourth-quarter data. Source: IMF
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14.
2009
2010
2011
Fiscal Score – Debt Burden
Source: Standard & Poor’s Ratings Services “The Emerging U.S. – ‘AAA’ G-5 Credit Gap And
What Could Stabilize Or Widen It” as of September 14, 2011.
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15.
Fiscal Score – Net General Government Debt
Net general government
debt/GDP (%)
2010
2011
2012e
2013f
2014f
100
90
80
70
60
50
40
30
20
10
0
Canada
U.S.
U.K.
France
General government: All levels of government plus social security programs. Data based on calendar years.
e--Estimated. f--Forecast.
Source: Standard & Poor's Rating Services "Sovereign Risk Indicators" as of June 27, 2012.
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16.
Germany
Fiscal Score – General Government Balance
2010
2011
2012e
2013f
2014f
General government
balance/GDP (%)
0
-2
-4
-6
-8
-10
-12
Canada
U.S.
U.K.
France
General government: All levels of government plus social security programs. U.S. data based on fiscal year ending Sept. 30; all other data based on calendar
year. E--Estimated. F--Forecast.
Source: Standard & Poor's Rating Services "Sovereign Risk Indicators" as of June 27, 2012.
© Standard & Poor's 2012.
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
17.
Germany
Fiscal Score – Fiscal Performance And Flexibility
Source: Standard & Poor’s Ratings Services “The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It” as of September 14, 2011.
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
18.
Fiscal Score – Contingent Liability Assessment
Source: Standard & Poor’s Ratings Services “Sovereign Government Rating Methodology And Assumptions,” June 30, 2011.
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19.
Risk-Adjusted Capital Framework (RACF) Estimate
• Banking sector’s unexpected losses over a three-year stress
scenario
• Stress scenario involves:
 Real GDP decline by as much as 6%
 Unemployment rate as high as 15%
 Stock market drop as much as 60%
• Stress scenario losses from aggregating individual bank riskweighted asset profiles, with risk weights varying according to
our BICRA for the country
• Banking sector contingent liability to sovereign =
(RACF losses + 7% of risk-weighted assets) - aggregate total adjusted capital
Source: Standard & Poor’s Ratings Services “Sovereign Government Rating Methodology And Assumptions,” June 30, 2011.
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
20.
Economic Risk
Global BICRA Outcomes
BICRA Groups: Lowest to Highest Risk
Source: Standard & Poor’s, Banking Industry Country Risk Assessment Update: October 2012 (02-Oct-2012)
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21.
Industry Risk
Political Score
Source: Standard & Poor’s Ratings Services “The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It” as of September 14, 2011.
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
22.
‘AAA’ Sovereign Ratings Stability
Source: Standard & Poor’s Rating Services “Sovereign Defaults and Transition Data, 2011 Update” as of March 2, 2012.
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23.
Can A Sovereign Regain A ‘AAA’ Rating…?
• Since 1975, nine sovereigns have lost their ‘AAA’ rating
• Of those, five have regained it
– Canada after nine years (October 1992 to July 2002)
– Australia after 16 years (December 1986 to February 2003)
– Finland after nine years (March 1992 to February 2002)
– Sweden after 10 years (March 1993 to February 2004)
– Denmark after 18 years (January 1983 to February 2001)
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24.
Sovereign Ratings Performance
S&P Sovereign Foreign Currency Cumulative Average Default Rates*, 1975-2011
Horizon (%)
Rating
Y1
Y3
Y5
Y10
Y15
AAA
0.00
0.00
0.00
0.00
0.00
AA
0.00
0.00
0.00
0.00
0.00
A
0.00
0.00
0.00
0.00
0.00
BBB
0.00
1.30
3.40
5.20
5.20
BB
0.60
3.10
5.30
11.10
15.20
B
1.70
6.10
10.70
24.10
35.90
CCC/CC
36.40
56.40
68.80
N/A
N/A
Investment Grade
0.00
0.30
0.60
1.00
1.00
Speculative Grade
2.40
6.30
10.00
19.00
24.80
All Rated
0.80
2.20
3.50
6.00
6.90
Source: S&P CreditPro®.
N/A - Not available, there are no observations for this horizon.
*Default rates conditional on survival. Implied senior debt ratings through 1995, sovereign credit ratings thereafter.
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25.
Private Sector And Sovereign Cumulative Default Rates
Cumulative Average Default Rates By Rating Over Five-Year Time Horizon
Private Sector, 1981-2011
80.0
Sovereign, 1975-2011
68.8
70.0
Default Rate (%)
60.0
46.7
50.0
40.0
30.0
20.8
20.0
10.7
8.6
10.0
0.4 0.0
0.4 0.0
0.7 0.0
AAA
AA
A
2.3 3.4
5.3
0.0
Source: Standard & Poor’s Ratings Services.
BBB
BB
Initial Rating
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26.
B
CCC
Related Articles
•
S&P Report Says Europe’s Economic Indicators Are Painting A Bleak Picture, But Country Prospects Differ
(Standard & Poor’s, September 25, 2012)
•
Financial Repression Would Hurt the Highest-Rated Sovereigns, But Help Those At The Bottom (Standard &
Poor’s, August 30, 2012)
•
Germany ‘AAA/A-1+’ Ratings Affirmed On Strong Economic Fundamentals; Outlook Remains Stable (Standard &
Poor’s, August 1, 2012)
•
United Kingdom ‘AAA/A-1+’ Ratings Affirmed; Outlook Remains Stable (Standard & Poor’s, July 27, 2012)
•
United States Of America ‘AA+/A-1+’ Ratings Affirmed; Outlook Remains Negative On Continued Political And
Fiscal Risks (Standard & Poor’s, June 8, 2012)
•
France’s Unsolicited Long-Term Ratings Lowered to ‘AA+’; Outlook Negative (Standard & Poor’s, January 13,
2012)
•
Standard & Poor's Puts Ratings On Eurozone Sovereigns On CreditWatch With Negative Implications (Standard
& Poor’s, December 5, 2011)
•
The Emerging U.S. – ‘AAA’ G-5 Credit Gap And What Could Stabilize Or Widen It (Standard & Poor’s, September
14, 2011)
•
United States of America Long-Term Rating Lowered To 'AA+' On Political Risks And Rising Debt Burden;
Outlook Negative (Standard & Poor’s, August 5, 2011)
•
United States of America ‘AAA/A-1+’ Ratings Placed On Credit Watch Negative On Rising Risk Of Policy
Stalemate (Standard & Poor’s July 14, 2011)
•
Sovereign Government Rating Methodology and Assumptions (Standard & Poor’s, June 30, 2011)
•
United States of America ‘AAA/A-1+’ Ratings Affirmed; Outlook Revised To Negative (Standard & Poor’s, April
18, 2011)
•
Global Aging 2010: An Irreversible Truth (Standard & Poor’s, October 7, 2010)
Source: The Standard & Poor’s Ratings Services articles listed above are available on standardandpoors.com.
Permission to reprint or distribute any content from this presentation requires the prior written approval of Standard & Poor’s.
27.
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