Ratings agencies missed the meltdown in the housing market and the rising debt tide that swept over European capitals. We wanted to see if they are awarding Triple-A ratings to countries which did not deserve them.
Our review included data from Standard & Poor’s and Moody’s along with statistics from the Economist Intelligence Unit and the CIA World Factbook. What we found is that is not all Triple-A ratings are the same. Some nations with just a few million people and small economies might be quite as safe as the larger nations.
S&P rates fewer than 20 nations “AAA” on Sovereign local currency ratings, Sovereign foreign currency ratings, and the Transfer and convertibility assessment. S&P’s current “AAA” sovereign rated nations are Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Isle of Man, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland, the United Kingdom, and the United States. We also reviewed the Moody’s ratings to make sure the discrepancies are not overlooked.
Our take is that not all Triple-A ratings are as reflective of risk as many investors would hope. It was not until 2009 that S&P took away its “AAA” rating on Ireland, while Italy lost its “AAA” rating in the 1990s. The big news earlier this year was a Japan downgrade, but Japan actually lost its “AAA” rating long ago. Spain was “AAA” in the 1990’s, then “AA” and then was raised back to “AAA” before losing the highest rating in 2009.
The Economist published its Economist Intelligence “The Country Risk Service” in January. Among these, Norway was the only “AAA” rating. The sovereign rating is meant to measure “the risk of a build-up in arrears of principal and/or interest on foreign- and/or local-currency debt that is the direct obligation of the sovereign or guaranteed by the sovereign.” The United States was “AA” on this list, along with Canada, Denmark, Finland, Germany, Hong Kong, Netherlands, Qatar, Sweden, and Switzerland.
Australia is a solid “AAA” despite the major flooding the country experienced. The country has a low population and a massive land mass that is rich in natural resources. The company benefits from English as the native language, lower labor costs and again all that rich land. It has only about 21.5 million people along with a GDP of roughly $889.6 billion per the 2010 CIA projections. The “AAA” rating is stable at S&P and “Aaa” with a stable outlook at Moody’s.
Austria is another Triple-A rated nation with a mostly stable outlook. It has a rather low population of just over 8.2 million as of 2010 and its 2010 GDP was put at roughly $332.9 billion per CIA figures. The nation is highly tied to Germany and it was not immune to the financial meltdown as many of its banks were making far too risky loans in Eastern and Southeastern Europe. The EIU noted, “Even after the global economic outlook improves, Austria will need to continue restructuring, emphasizing knowledge-based sectors of the economy, and encouraging greater labor flexibility and greater labor participation to offset growing unemployment and Austria’s aging population and exceedingly low fertility rate.” S&P rates a solid “AAA” with a stable rating and Moody’s has “Aaa” with a stable rating. Our own risk assessment is probably a bit more critical than S&P and Moody’s and we’d see this is a harsher light if the economy suddenly plunges again and if its banks go back to excessive lending to lower-credit countries.