Leeds School of Business



Standard and Poor’s Sovereign Debt RatingsSovereign credit ratings reflect Standard & Poor's Ratings Services' opinions on the future ability andwillingness of sovereign governments to service their commercial financial obligations in full and on time.A sovereign rating is a forward-looking estimate of default probability. A sovereign rating does notaddress recovery or loss given default. Sovereign ratings also are not country ratings, animportant and often misunderstood distinction. Thus, they do not speak specifically to exchange rate orregulatory risk or any of a host of country characteristics that affect the operating and financialenvironment of a private sector entity. Sovereign ratings address the credit risk of national governments, but not the specific default risk of otherissuers.Key Sovereign Rating Factors Standard & Poor's sovereign credit analysis focuses on: Political trends and institutions. Economic structure and prospects. The government's economic strategy, particularly its fiscal and monetary policies as well as its plans for privatization and other microeconomic reform. Additional factors likely to support or erode incentives for timely debt service. Standard & Poor's ratings scale: AAA to BBB are investment grade. BB to C are non-investment grade. SD signifies an issuer in selective default and D signifies full default.Standard & Poor's Ratings Services currently rates 126 sovereign governments as shown in the table below.Sovereign Ratings As Of Dec. 9, 2010CountrySovereign local currency ratings (LT/Outlook/ST)Sovereign foreign currency ratings (LT/Outlook/ST)Abu DhabiAA/Stable/A-1+AA/Stable/A-1+AlbaniaB+/Stable/B B+/Stable/B AndorraA/Negative/A-1A/Negative/A-1AngolaB+/Stable/BB+/Stable/BArgentinaB/Stable/BB/Stable/BArubaA-/Negative/A-2A-/Negative/A-2AustraliaAAA/Stable/A-1+AAA/Stable/A-1+AustriaAAA/Stable/A-1+AAA/Stable/A-1+Azerbaijan BB+/Positive/B BB+/Positive/B BahamasBBB+/Stable/A-2BBB+/Stable/A-2BahrainA/Stable/A-1A/Stable/A-1BangladeshBB-/Stable/B BB-/Stable/B BarbadosBBB-/Stable/A-3BBB-/Stable/A-3BelarusBB/Negative/BB+/Negative/BBelgiumAA+/Stable/A-1+AA+/Stable/A-1+BelizeB/Stable/BB/Stable/BBeninB/Stable/BB/Stable/BBermudaAA/Stable/A-1+AA/Stable/A-1+BoliviaB/Positive/BB/Positive/BBosnia and HerzegovinaB+/Stable/B B+/Stable/B BotswanaA/Stable/A-1A-/Stable/A-2BrazilBBB+/Stable/A-2BBB-/Stable/A-3Bulgaria BBB/Stable/A-3BBB/Stable/A-3Burkina FasoB/Stable/BB/Stable/BCambodiaB+/Stable/BB+/Stable/BCameroonB/Stable/BB/Stable/BCanadaAAA/Stable/A-1+AAA/Stable/A-1+Cape VerdeB+/Negative/B B+/Negative/B ChileAA/Stable/A-1+A+/Stable/A-1ChinaA+/Stable/A-1+A+/Stable/A-1+ColombiaBBB+/Stable/A-2BB+/Positive/BCook IslandsBB/Negative/BBB/Negative/BCosta RicaBB+/Stable/BBB/Stable/BCroatiaBBB/Negative/A-3BBB/Negative/A-3CyprusA/Negative/A-1A/Negative/A-1Czech RepublicA+/Stable/A-1A/Positive/A-1DenmarkAAA/Stable/A-1+AAA/Stable/A-1+Dominican RepublicB/Positive/BB/Positive/BEcuador B-/Stable/C B-/Stable/CEgyptBBB-/Stable/A-3BB+/Stable/BEl SalvadorBB/Stable/BBB/Stable/BEstoniaA/Stable/A-1A/Stable/A-1FijiB/Stable/CB-/Stable/CFinlandAAA/Stable/A-1+AAA/Stable/A-1+FranceAAA/Stable/A-1+AAA/Stable/A-1+GabonBB-/Stable/BBB-/Stable/BGeorgiaB+/Stable/BB+/Stable/BGermanyAAA/Stable/A-1+AAA/Stable/A-1+GhanaB/Stable/BB/Stable/BGreeceBB+/Watch Neg/BBB+/Watch Neg/BGrenadaB-/Stable/CB-/Stable/CGuatemalaBB+/Stable/BBB/Stable/BGuernseyAAA/Stable/A-1+ AAA/Stable/A-1+ HondurasB/Stable/BB/Stable/BHong KongAA+/Stable/A-1+AA+/Stable/A-1+HungaryBBB-/Negative/A-3BBB-/Negative/A-3IcelandBBB/Negative/A-3BBB-/Negative/A-3IndiaBBB-/Stable/A-3BBB-/Stable/A-3IndonesiaBB+/Positive/BBB/Positive/BIrelandA/Watch Neg/A-1A/Watch Neg/A-1Isle of ManAAA/Stable/A-1+AAA/Stable/A-1+IsraelAA-/Stable/A-1+A/Stable/A-1ItalyA+/Stable/A-1+A+/Stable/A-1+JamaicaB-/Stable/CB-/Stable/CJapanAA/Negative/A-1+AA/Negative/A-1+JordanBBB-/Stable/A-3BB/Stable/BKazakhstanBBB/Stable/A-3BBB-/Stable/A-3KenyaB+/Stable/BB+/Stable/BKoreaA+/Stable/A-1A/Stable/A-1Kuwait AA-/Stable/A-1+AA-/Stable/A-1+LatviaBB+/Stable/BBB+/Stable/BLebanon B/Positive/BB/Positive/BLibyaA-/Stable/A-2A-/Stable/A-2LiechtensteinAAA/Stable/A-1+AAA/Stable/A-1+LithuaniaBBB/Stable/A-3BBB/Stable/A-3LuxembourgAAA/Stable/A-1+AAA/Stable/A-1+Macedonia BB+/Stable/BBB/Stable/BMalaysiaA+/Stable/A-1A-/Stable/A-2MaltaA/Stable/A-1A/Stable/A-1MexicoA/Stable/A-1BBB/Stable/A-3MongoliaBB-/Stable/BBB-/Stable/BMontenegroBB/Negative/BBB/Negative/BMontserratBBB-/Positive/A-3BBB-/Positive/A-3MoroccoBBB+/Stable/A-2BBB-/Stable/A-3MozambiqueB+/Stable/BB+/Stable/BNetherlandsAAA/Stable/A-1+AAA/Stable/A-1+New ZealandAAA/Stable/A-1+AA+/Negative/A-1+NigeriaB+/Stable/BB+/Stable/BNorwayAAA/Stable/A-1+AAA/Stable/A-1+OmanA/Stable/A-1A/Stable/A-1PakistanB-/Stable/CB-/Stable/CPanamaBBB-/Stable/A-3BBB-/Stable/A-3Papua New GuineaBB-/Stable/BB+/Stable/BParaguay B+/Positive/BB+/Positive/BPeruBBB+/Stable/A-2BBB-/Positive/A-3PhilippinesBB+/Stable/BBB/Stable/BPolandA/Stable/A-1A-/Stable/A-2PortugalA-/Watch Neg/A-2A-/Watch Neg/A-2QatarAA/Stable/A-1+AA/Stable/A-1+Ras Al KhaimahA/Stable/A-1A/Stable/A-1RomaniaBBB-/Stable/A-3BB+/Stable/BRussiaBBB+/Stable/A-2BBB/Stable/A-3Saudi Arabia AA-/Stable/A-1+AA-/Stable/A-1+Senegal B+/Negative/BB+/Negative/BSerbiaBB-/Stable/BBB-/Stable/BSingaporeAAA/Stable/A-1+AAA/Stable/A-1+Slovak RepublicA+/Stable/A-1A+/Stable/A-1SloveniaAA/Stable/A-1+AA/Stable/A-1+South AfricaA+/Negative/A-1BBB+/Negative/A-2SpainAA/Negative/A-1+AA/Negative/A-1+Sri LankaBB-/Stable/BB+/Stable/BSuriname BB-/Positive/BB+/Positive/BSwedenAAA/Stable/A-1+AAA/Stable/A-1+SwitzerlandAAA/Stable/A-1+AAA/Stable/A-1+TaiwanAA-/Stable/A-1+AA-/Stable/A-1+ThailandA-/Stable/A-2BBB+/Stable/A-2Trinidad and TobagoA+/Stable/A-1A/Stable/A-1TunisiaA-/Stable/A-2BBB/Stable/A-3TurkeyBB+/Positive/BBB/Positive/BUgandaB+/Stable/B B+/Stable/B UkraineBB-/Stable/BB+/Stable/BUnited KingdomAAA/Stable/A-1+AAA/Stable/A-1+United StatesAAA/Stable/A-1+AAA/Stable/A-1+UruguayBB/Stable/BBB/Stable/BVenezuelaBB-/Stable/BBB-/Stable/BVietnamBB+/Negative/BBB/Negative/BCase Study: Japan Credit Rating Cut by Standard & Poor’s, January 27, 2011Japan’s sovereign credit rating was cut for the first time in nine years on concern that Prime Minister Naoto Kan hasn’t done enough to curb an $11 trillion debt burden, the world's largest. The nation’s debt is now ranked AA-, the fourth-highest level and alongside China, by Standard & Poor’s. The reduction from AA was announced by Standard & Poor’s in a statement today. Standard & Poor’s lowered its sovereign credit rating for Japan to AA- from AA. That is three levels below the highest possible rating, and Standard and Poor’s first downgrade of Japanese government debt since 2002. With the lower grade, Japan’s debt rating is now on par with China’s, which last year overtook Japan as the world’s second-largest economy, after the United States. Standard & Poor’s move came just weeks after both it and its rival ratings agency, Moody’s, cautioned that they might take a more negative stance on the United States. It highlighted just how deeply indebted many of the world’s developed economies remain — despite concerted efforts on the parts of governments to improve their balance sheets. But by size, Japan’s ballooning deficit is an anomaly. Japan’s liabilities will hit 204 percent of its gross domestic product this year, overshadowing even the 137 percent for beleaguered Greece, according to figures from the Organization for Economic Cooperation and Development.Standard & Poor’s., in downgrading Japan, warned that the Japanese government had no “coherent strategy” to address its ballooning deficit, and that its already high debt burden was likely to continue to rise further than it had anticipated before the financial crisis. A rapidly aging population is adding to the country’s woes, raising the likelihood of increasing social security and pension obligations in the future. Standard& Poor’s. said it expected Japan’s debt to continue rising until the middle of this decade, and “we do not forecast the government achieving a primary balance before 2020, unless a significant fiscal consolidation program is implemented beforehand.”Despite the staggering size of Japan’s debt-to-G.D.P. ratio, most of Japan’s debt is held domestically, unlike that of Greece or the United States. And Japan runs a current-account surplus in trade, putting it on a more stable financial footing. Japan’s borrowing costs remain among the lowest in the industrialized world. The yield on a benchmark 10-year Japanese government bond hovered around 1.25 percent late afternoon in Tokyo.The United States, France, Germany and Britain are among major economies that retain AAA ratings, although some investors suspect that they, too, may become more vulnerable if growth slows anew or if their public finances fail to improve. This month, Moody’s and Standard & Poor’s both warned that the AAA rating for the United States could be reviewed in a couple of years if its debt kept growing. But a downgrade appears unlikely as long as the United States economy and the dollar retain their global dominance. Reaction in Financial Markets The yen and bond futures fell on concern the downgrade will push up the cost of borrowing for Japan, where public debt is about twice the size of gross domestic product. Vice Finance Minister Fumihiko Igarashi this week said the government must fix its finances to avoid a debt crisis that could trigger a “global depression.” “I hope this serves as a warning for the government, they have absolutely no sense of crisis,” said Azusa Kato, an economist at BNP Paribas in Tokyo. “Once bond yields spike and the fire is lit, the amount needed to finance Japan’s borrowing needs is going to jump and it’s going to be too late.” The yen weakened and stocks swung between gains and losses after the announcement. The currency fell against all of its main counterparts and was trading at 82.89 per dollar as of 8:49 a.m. in New York. Thirteen Japanese companies included in the benchmark Topix stock index are more highly rated than AA- by S&P, including Toyota Motor Co. Shiori Hashimoto, a spokeswoman for Toyota City, Japan-based Toyota, declined to comment. It is possible for companies to have higher ratings than the local or foreign currency ratings of their home country, S&P said in a May 2009 report. The best candidates have a robust export base, little reliance on the public sector and sell products with “relatively inelastic” demand. The S&P report said businesses with sales mainly in local currency, subject to regulation and heavily dependent on imports probably won’t pass stress tests without “heavy overcollateralization or reserves.” Japan joins developed economies including Portugal and Spain in being downgraded as emerging nations bounce back more strongly from the global recession. The previous change to Japan’s rating by S&P was an upgrade in 2007, before the financial crisis. The nation lost its AAA rating, the highest grade, in 2001 after holding it since 1975. With domestic investors holding more than 90 percent of Japanese government bonds, the downgrade “probably won’t prompt them to move money out of Japanese bonds into foreign assets because the problem of sovereign debt is worsening worldwide,” said Naomi Hasegawa, a senior debt strategist in Tokyo at Mitsubishi UFJ Morgan Stanley Securities Co., a unit of Japan’s largest lender by assets. By putting Japan alongside China, the downgrade highlights the rise of the neighbor that has led the global recovery. S&P has upgraded China five times in the past decade, most recently in December when it cited the nation’s world-record foreign- exchange reserves, now $2.85 trillion. The International Monetary Fund estimated that China’s ratio of debt to GDP would be 20 percent in 2010, a prediction that excluded local-government liabilities. In comparison, it estimates Japan’s burden exceeds 200 percent. The Bank of Japan this week kept its benchmark interest rate near zero even as it raised its growth forecast for the year ending March to 3.3 percent from an October estimate of 2.1 percent. Japan’s borrowing costs are among the lowest in the industrialized world, helping it fund its debt load. The yield on the benchmark 10-year bond slipped 1 basis point to 1.23 percent as of 10:47 p.m. in Tokyo. It touched 1.26 percent in Jan. 19, the highest since Dec. 16. As a consequence of today’s downgrade, S&P lowered ratings on other entities including four insurers and six government- related institutions including Japan Finance Corp., Japan International Cooperation Agency and Japan Finance Organization for Municipalities, according to a separate statement. All institutions are now graded AA- at the company. ................
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