Not All Aaa Credit Ratings Are Cut From The Same Cloth

Faced with today's financial hurricane, credit ratings agency Moody's announced how it ascertians risks conditions that may impact Aaa sovereign debt ratings of developed economies.

Researchrecap quotes Moody's, ``For a Aaa government to be downgraded, Moody’s must have concluded that the deterioration in credit metrics is (1) observable and material in absolute terms; (2) observable and material in relative terms; and (3) unlikely to be reversed in the near future,” Moody’s says. “The decision underlying a potential downgrade would also depend on the extent of the actual and potential deterioration of a government’s balance sheet; whether a country’s economic model can be regenerated, thereby allowing the economy to rebound; and whether governments can repair their fiscal position by raising taxes or cutting expenditure.”

graph from Moody's

So from the said conditions Moody's categorizes them into three groups:

1. Resistant Aaa countries, such as Germany, whose rating is so far largely untested despite strong headwinds;

my comment:

Germany, France, Austria and Switzerland are rated higher than the US or UK even if they are all Aaa.

2. Resilient Aaa countries, such as the UK and the US, whose ratings are being tested but, in our view, display sufficient capacity to grow out of their debt and repair the damage;

my comment:

Moody's is being too optimistic. Once the latest stimulus measures fail to achieve its objectives, we will probably see more of the same efforts.

And additional government resources thrown to resuscitate the economy may constrain strained economic resources which may eventually risk jeopardizing the present ratings standing.

Remember, during the credit bubble days, Moody's was instrumental in providing Aaa ratings to obscure structured finance products, which eventually turned out to be "toxic" and which remains a key burden to the banking system's seeming inextricable balance sheets.

3. Vulnerable Aaa countries (Ireland and, to a lesser extent, Spain) who face equally stern challenges and whose rating will depend on their ability to rapidly regenerate their economies. Indeed, in the case of Ireland, Moody’s placed its Aaa rating on negative outlook on 29 January 2009.

my comment:

Aaa ratings like ALL government guarantees are never risk free.

Besides, grading sovereign papers isn't entirely about finance or economics but likewise subject to political impediments or possibly conflict of interest issues.

Perhaps we will see some material downgrades among some of these Aaa sovereigns as the crisis reach maturity.

(Source Research Recap )