Ups in Downgrades: S&P accelerates negative credit ratings changes in 2012

2011 was a busy year for the ratings agencies with regards to country credit ratings, and 2012 is poised to be another active year. Last year, Standard & Poor’s adjusted its long-term sovereign credit ratings for 45 nations, compared to 34 ratings changes in 2010. We are only a few weeks into 2012, and S&P has already downgraded 10 countries.

The main headline grabbers have been the countries that lost their coveted AAA ratings: United States (Aug. 2011), New Zealand (Sept. 2011), Austria (Jan. 2012) and France (Jan. 2012). In all, the January 2012 changes encompassed downgrades to nine of the 17 Eurozone countries, with three others having already seen one or more downgrades during 2011 (Belgium, Greece, and Ireland). Currently only 16 countries or organizations around the world have the AAA rating; interestingly, the Eurozone is one of them, even though only four member countries are now rated AAA by S&P (Finland, Germany, Luxembourg, and Netherlands).

It is important to note that not all of the 2011 ratings changes were downgrades; in fact there were 11 upgrades. These primarily included emerging countries in Eastern Europe and Latin America, such as Brazil, Czech Republic, and Estonia (the only Eurozone country to be upgraded). S&P praised these countries’ government leaders for sticking to prudent management of their monetary and fiscal policies in the face of the global economic slowdown.

This kind of policy discipline is also what the primary lenders in resolving this debt crisis, the European Central Bank and the IMF, are striving to instill. However, the ratings cuts complicate the situation by pushing up the borrowing costs for countries already facing heavy debt burdens. The debt contagion in Europe has now heightened the risk of another recession in the region, as tightening credit has led to a significant slowdown in economic activity across the board. The ratings agencies will be keeping close tabs on this ever-evolving situation, and continued downgrades are not out of the question.

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