Moody's: Decline in credit quality of sovereign issuers in advanced economies levels off in 2014

A study of the rating and default histories of 128 Moody's-rated governments during the last 31 years shows that the decline in credit quality among advanced economies has leveled off, says Moody's Investors Service in a report published today.

"Before the global financial crisis, no advanced economies held non-investment-grade ratings. By the peak of the crisis in mid-2013, however, five did: Greece (C), Cyprus (Caa3), Portugal (Ba3), Ireland (Ba1) and Slovenia (Ba1)," says Merxe Tudela, a Moody's Vice President and Senior Analyst.

"Now, only three countries still hold non-investment-grade ratings: Cyprus (B3 stable), Greece (Caa1 on review for downgrade) and Portugal (Ba1 stable). Both Ireland (Baa1 stable) and Slovenia (Baa3 stable) have since regained their investment-grade ratings."

By contrast, the proportion of emerging economies rated non-investment-grade has been more or less the same since year-end 2007. This is the result of the counter-balancing upgrades of 10 emerging market countries into the investment-grade category, and the assignment of 20 new (mostly non-investment grade) ratings to emerging economies.

As part of the study, Moody's also compared its sovereign and corporate ratings; given its large size and extensive rating history, the Moody's-rated corporate universe functions as an effective benchmark for the rating performance of other issuers, including sovereigns. The results show that Moody's ratings were highly predictive of sovereign default risk throughout the study period. One year prior to defaulting, the typical sovereign defaulter carried a rating lower than 94% of all other sovereign ratings, where the typical corporate defaulter carried a lower rating than 88% of all other corporate ratings.