Tag: sovereign credit ratings

Moody’s cuts D.C. rating outlook to match U.S.; holds steady on Florida, Maryland, Virginia

Mary Pat Campbell

Link: https://fixedincome.fidelity.com/ftgw/fi/FINewsArticle?id=202311131727SM______BNDBUYER_0000018b-c9ff-d00d-ad8b-ebff49580002_110.1

Excerpt:

Moody’s Investors Service (MCO) revised its rating outlook for the Aaa-rated District of Columbia to negative Monday, matching its Friday action on the United States government.

At the same time, the rating agency affirmed the Aaa issuer ratings and stable outlooks of Florida, Maryland and Virginia.

The actions follow Friday’s outlook revision on the United States to negative from stable by Moody’s while it affirmed the U.S. sovereign rating at Aaa.

Moody’s said the main reason for the negative outlook on the United States was its assessment that “the downside risks to the U.S.’ fiscal strength have increased and may no longer be fully offset by the sovereign’s unique credit strengths.

“In the context of higher interest rates, without effective fiscal policy measures to reduce government spending or increase revenues, Moody’s expects that the U.S.’ fiscal deficits will remain very large, significantly weakening debt affordability,” the rating agency said. “Continued political polarization within U.S. Congress raises the risk that successive governments will not be able to reach consensus on a fiscal plan to slow the decline in debt affordability.”

Author(s): Chip Barnett

Publication Date: 13 Nov 2023

Publication Site: Fidelity Fixed Income – Bond Buyer

What Happens if US Debt Defaults? Just Short-Term Pain, Sages Say

Mary Pat Campbell

Link: https://www.ai-cio.com/news/what-happens-if-us-debt-defaults-just-short-term-pain-sages-say/

Excerpt:

So what is likely to occur this year?

Everything will be settled without a big problem for investors, predicts Robert Hunkeler, International Paper’s vice president of investments.

“I guess Congress and the White House will eventually finish their game of chicken, and the debt limit will be raised,” he opines. “There might be a little more drama and brinksmanship this time around, because there are more cooks in Congress than usual, and that’s saying a lot. Either way, I wouldn’t change my investments because of it.”

To Kostin and his Goldman staff, the risk that Congress fails to boost the debt limit by the deadline is “higher than at any point since 2011,” but “the team believes it’s more likely that Congress will raise the debt limit before the Treasury is forced to delay scheduled payments.”

If the debt ceiling is not raised in time to make those payments, in Goldman’s estimate, the economy would shrink by about $225 billion per month, or 10% of annualized gross domestic product. That’s provided that the Treasury does what policy wonks call, “prioritize,” meaning somehow continuing to pay interest on the national debt, but to stop payment on other obligations.

For Thomas Swaney, CIO for global fixed income at Northern Trust Asset Management, another credit downgrade for the government is possible.

“The practical implications of a credit downgrade are not entirely clear,” he writes in a report. “But we don’t expect a modest downgrade to result in market disruptions for Treasuries, U.S. agency debt or overnight repurchase agreements.”

Author(s): Larry Light

Publication Date: 6 Feb 2023

Publication Site: ai-CIO

Cultural stereotypes of multinational banks

Mary Pat Campbell

Link: https://cepr.org/voxeu/columns/cultural-stereotypes-multinational-banks

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Excerpt:

Previous studies (e.g. Guiso et al. 2006, 2009) have used aggregate survey data from Eurobarometer to show that the volume of flows between pairs of countries is importantly affected by bilateral trust. A limitation of such country-level evidence is that average levels of trust are almost certainly correlated with unobserved characteristics of country pairs. To rule out confounding factors, we therefore develop a bank-specific measure of trust.

For this purpose, we model banks as hierarchies (as illustrated by Figure 1). Strategic decisions such as whether or not a bank should invest in a country are generally taken at bank headquarters. Portfolio managers working in the headquarters country or elsewhere are then responsible for implementing those decisions. Because we are concerned with investment decisions undertaken by headquarters, we focus our analysis on the extensive margin of sovereign exposures – whether or not a bank invests in the bonds of a country, as opposed to exactly how much it invests.

Given this framework, cultural stereotypes in subsidiaries can shape the soft information that subordinates transmit up the hierarchy to headquarters, where the broad parameters guiding portfolio investment decisions are set. They can affect how that soft information is received by directors, because the latter share the same stereotypes, reflecting the extent to which banks hire and promote internally across borders, such that the composition of bank boards and officers reflects the geography of the bank’s branch network. We provide empirical support for this framework by showing that multinational branch networks help predict the national composition of high-level managerial teams at bank headquarters.

Author(s): Orkun Saka, Barry Eichengreen

Publication Date: 23 Dec 2022

Publication Site: VoxEU

Sovereign Defaults Hit Record in 2020; More Are Possible

Mary Pat Campbell

Link: https://www.fitchratings.com/research/sovereigns/sovereign-defaults-hit-record-in-2020-more-are-possible-08-06-2021

Graphic:

Excerpt:

The sovereign issuer-based default rate rose to a record high in 2020 against a backdrop of weakened sovereign credit profiles due to the Covid-19 pandemic, Fitch Ratings says. Downgrade pressures have eased this year, but our ratings indicate that more defaults are possible.

Fitch’s recent Sovereign 2020 Transition and Default Study shows that five Fitch-rated sovereigns defaulted in 2020, up from only one in the previous year. As a result, the sovereign default rate rose more than threefold to 4.2% from 0.9% in 2019. The previous high was 1.8% in both 2016 and 2017.

Publication Date: 8 June 2021

Publication Site: Fitch Ratings