Monday, 16 December 2013

2013 round up

During 2013 there have been 18 downgrades and only 8 upgrades, which has mirrored the preponderance for more downgrades since 2011-12. The balance of outlooks hasn't really changed - about 2/3 are stable, and of the remaining 1/3, most are negative non-stable outlooks. In Europe, there are now - at the end of 2013 - far fewer negative outlooks than there were at the beginning of the year, although some of these are due to downgrades having taken place. There are a few more positive outlooks at the end of 2013 in Europe than had been the case in January. The opposite has occurred in the Asia-Pacific region, where there are more negative outlooks at the end of 2013 than the beginning.

There have been drives by both S&P's and Moody's to make their sovereign rating methodologies more transparent and generally clearer, as global bond yields showed that investors actually ignored 56% of Moody's and 50% of S&P's rating and outlook changes last year. This was in particular when the CRAs said the governments were becoming more or less safe. The revised methodologies haven't seen vast alterations in sovereign ratings, and are readily accessible. The CRAs state that they want their methodologies to be so transparent that investors can use them to estimate their own version of a sovereign rating that should be no more than three tranches away from the rating assigned by the CRA.

This poses questions, not least surrounding the changing role of CRAs in the sovereign bond markets. By making their methodologies so transparent that any investor can use them to assign their own rating, have S&P's and Moody's become simple providers of a list of pointers investors should consider when summing up the risks of investment? Moreover, when using the CRA methodology, the CRAs claim that investors should be able to estimate "within a three notch alpha numeric range" the likely rating assigned to a sovereign. But this indicates three notes above or below, which covers quite a wide variation in rating. The difference between three notches - according to the alpha numeric ranges set out by any of the Big Three agencies - encompasses a substantial variation in the level of risk. Added to this, once an investor has taken the time to use the methodology for herself to estimate the sovereign risk rating, she then finds a potential three notch divergence between her result and that assigned by the CRA. And there appears to be little she can do to square this circle. In short, the transparency ends here. 

No comments:

Post a Comment