Ratings agencies missed the meltdown in the housing market and the rising debt tide that swept over European capitals.  We wanted to see if they are awarding Triple-A ratings to countries which did not deserve them.

Our review included data from Standard & Poor’s and Moody’s along with statistics from the Economist Intelligence Unit and the CIA World Factbook. What we found is that is not all Triple-A ratings are the same.  Some nations with just a few million people and small economies might be quite as safe as the larger nations.

S&P  rates fewer than 20 nations “AAA” on Sovereign local currency ratings, Sovereign foreign currency ratings, and the Transfer and convertibility assessment. S&P’s current “AAA” sovereign rated nations are Australia, Austria, Canada, Denmark, Finland, France, Germany, Guernsey, Isle of Man, Liechtenstein, Luxembourg, Netherlands, Norway, Singapore, Sweden, Switzerland, the United Kingdom, and the United States.  We also reviewed the Moody’s ratings to make sure the discrepancies are not overlooked.

Read How The US Can Get Its Triple-A Rating Back

 

Our take is that not all Triple-A ratings are as reflective of risk as many investors would hope.  It was not until 2009 that S&P took away its “AAA” rating on Ireland, while Italy lost its “AAA” rating in the 1990s.  The big news earlier this year was a Japan downgrade, but Japan actually lost its “AAA” rating long ago.  Spain was “AAA” in the 1990’s, then “AA” and then was raised back to “AAA”  before losing the highest rating in 2009.

The Economist published its Economist Intelligence “The Country Risk Service” in January.  Among these, Norway was the only “AAA” rating.  The sovereign rating is meant to measure “the risk of a build-up in arrears of principal and/or interest on foreign- and/or local-currency debt that is the direct obligation of the sovereign or guaranteed by the sovereign.”  The United States was “AA” on this list, along with Canada, Denmark, Finland, Germany, Hong Kong, Netherlands, Qatar, Sweden, and Switzerland.

Australia

Australia is a solid “AAA” despite the major flooding the country experienced.  The country has a low population and a massive land mass that is rich in natural resources.  The company benefits from English as the native language, lower labor costs and again all that rich land.  It has only about 21.5 million people along with a GDP of roughly $889.6 billion per the 2010 CIA projections.  The “AAA” rating is stable at S&P and “Aaa” with a stable outlook at Moody’s.

Austria

Austria is another Triple-A rated nation with a mostly stable outlook. It has a rather low population of just over 8.2 million as of 2010 and its 2010 GDP was put at roughly $332.9 billion per CIA figures.  The nation is highly tied to Germany and it was not immune to the financial meltdown as many of its banks were making far too risky loans in Eastern and Southeastern Europe.  The EIU noted, “Even after the global economic outlook improves, Austria will need to continue restructuring, emphasizing knowledge-based sectors of the economy, and encouraging greater labor flexibility and greater labor participation to offset growing unemployment and Austria’s aging population and exceedingly low fertility rate.”  S&P rates a solid “AAA” with a stable rating and Moody’s has “Aaa” with a stable rating.  Our own risk assessment is probably a bit more critical than S&P and Moody’s and we’d see this is a harsher light if the economy suddenly plunges again and if its banks go back to excessive lending to lower-credit countries.

Canada

Canada is a solid Triple-A rating.  Its economy is very tied to the United States but it has vast natural resources and the nation did not allow its citizenry to swept up in the real estate bubble that hurt the United States.  Canada has a vast land mass that has much less population density and many truly remote areas.  Its population is about 33.75 million and its GDP is about $1.335 trillion.  Neither Moody’s nor S&P have any issues with the Triple-A ratings and stable outlook, and in many cases Canada could be considered among the safest Triple-A ratings out there.

Denmark

Denmark’s economy is strong and its population is well-educated.  The nation also has a large dependence upon trade. The nation has a population of just over 5.51 million and GDP was put at $204.1 billion per CIA 2010 estimates. It actually had a surplus in its balance of payments before the government spent to drive the economy, although high  property prices and a slowing trade did not keep it immune from the recession.  S&P has a solid “AAA” with a stable outlook and Moody’s has a “Aaa” with a stable outlook.  The country has so far opted to keep its Danish Kroner (crown) rather than officially joining the Euro.  Low birth rates, an aging population, taxation, immigration trends, and climate change are all risks for the small population longer-term by our count.  Still, the Tripe-A status remains firm here.

Finland

Finland is a Triple-A nation that may not be as prominent as a decade ago.  With a rather large land mass, it has a small population of about 5.25 million and a GDP of roughly $185.4 billion.  The nation relies heavily on trade.  Its technology sector is not as prominent as a decade ago because of Nokia’s decline.  The ratings grew after 2000 and both Moody’s and S&P have assigned it the top ratings with “stable” outlooks.  Finland is rich in timber but largely depends on imports of energy, raw materials, and many components for manufacturing.  Aging population trends, taxation risks, and problems of its great Nokia being such a large force of its economy keep us from considering Finland as solid as other Triple-A rated countries.

France

France is one of the world’s strongest nations and it is the second linchpin of the Euro.  The population is more than 64.7 million and GDP was ranked as #10 in the world at $2.16 trillion per 2010 CIA data.  The nation is becoming more market-driven as the government has exited many state-owned entities and France actually withstood the recession better than many other nations.  S&P is at “AAA” with a stable outlook and Moody’s is at “Aaa” with a stable outlook.  France is still better off than other Euro nations, but we view risks on a longer-term basis a bit more harshly than the ratings agencies.  Deficit spending trends and a high public debt level of about 84% of GDP are not good.  Pension reform, tax reform, demographics, immigration, a high degree of exposure to being one the white knights in the Eurozone bailouts, and what is considered a stubborn labor force all pose risks here that the ratings agencies may need to consider for the years ahead.

Germany

Germany is the King of the Euro to the point that some still jokingly refer to the Euro as the Deutsche Mark.  It is the key figure of the Euro and will have to be any part of Eurozone bailouts ahead as it is ranked as the fifth largest economy in the world.  The country has nearly 82.3 million people and a GDP of $2.951 trillion. Germany’s labor force is highly skilled and it has mostly absorbed the growing pains of assimilating East Germany into the fold.  S&P has a “AAA” rating and stable outlook and Moody’s has a “Aaa” with a stable outlook.  Budget deficits, subsidies, tax cuts, aging population trends, immigration and the obvious that it has to lead the Eurozone bailouts all pose risks long-term.  Public debt is also nearing 75% of GDP.  Still, the Triple-A rating here is not at risk.

The Netherlands

The Netherlands… Holland!  The land of tulips and windmills is in better shape than many Eurozone countries.  Its population is nearly 16.8 million and GDP is roughly $680.4 billion per 2010 CIA data.  Holland is considered a very solid Triple-A with its solid labor force, current account surplus, strong global industry and more compared to many of its Eurozone brethren.  The recession did not skip the nation with its high-tech exports and with its financial securities holdings, and budget deficits were high at 4.6% of 2009 targets and 5.6% of GDP in 2010 per CIA data.  Public debt is now 64.6% of GDP.  S&P rates its “AAA/stable” and Moody’s has a “Aaa/stable” rating.  Climate change poses a severe long-term risk to the country as much is at or below sea-level, although we don’t want to get too far out on rising water levels.

Norway

Norway has one of the best ratings going for it.  The Economist Intelligence Unit had the only true “AAA” rating on this one.  The nation is rich in resources, has only about 4.67 million people, and has a GDP of about $276.4 billion per CIA data.  Despite what some might call a welfare capitalism, the nation is almost self-sufficient due to fishing, oil, minerals, timber, and more.  About 50% of its exports are tied to oil and the government-owned oil sector has contributed to what is now the world’s second largest sovereign wealth fund valued at more than $500 billion in 2010.  S&P has a “AAA/stable” rating and Moody’s has a “Aaa/stable” rating.  While it has an aging population and holds some of the same risks as other European nations, Norway faces the same risks as countries in the Middle East (minus political instability): it is all tied to oil.

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Singapore

Singapore is one of the strongest of Triple-A ratings on its own and is really the safest place today for Asia.  Its population is among the smallest of Triple-A nations at only 4.7 million and its GDP is $292.2 billion.  Singapore was not immune to the recession, but its rebound was among the highest.  Public debt is technically very high at 102.4% of GDP but that is a government tie of the Central Provident Fund.  The government actually has not borrowed to finance deficits for what appears to be more than 20 years.  S&P has a “AAA/stable” rating and Moody’s has a “Aaa/stable” rating.  Its problem is the tiny size and it would probably have very little defense if any nations ever become invasion forces.  Climate change also poses risks, as does its dependence on trade and natural resources.

Sweden

Sweden is the largest of Scandinavian nations and it is a Triple-A.  Sweden has just over 9 million people and GDP is $354 billion per 2010.  S&P has a “AAA/stable” rating and Moody’s has a “Aaa/stable” rating.  Sweden was not wrecked by World War II due to neutrality and it relies heavily on exports.  The nation was not immune from the recession and it has reformed some of its finances while recovering.  While immigration and population trends have been an issue, public debt is still rather low at 40.8% of GDP.

Switzerland

It is no shock that Switzerland has a Triple-A rating.   One of the world’s banking centers and maker of watches and chocolate,  the mountainous nation has a population of just over 7.6 million and GDP of $326.9 billion.  Public debt is still under 40% of GDP, taxation is low, citizenship is not easy to get, and a blended public-private healthcare and retirement model make Switzerland a safe spot.  S&P has a “AAA/stable” rating and Moody’s has a “Aaa/stable” rating.

United Kingdom

The United Kingdom has had a Triple-A rating since the dawn of ratings and it is the third largest economy in Europe after Germany and France.  The large population of more than 62.3 million generated $2.189 trillion in projected 2010 GDP .  This is a rather tricky situation when it comes to ratings.  S&P has a “AAA/stable” rating and Moody’s has a “Aaa/stable” rating.  What is interesting is that after the peak of the meltdown woes, Britain’s rating by S&P did carry a “negative” outlook before that was reverted back to a “Stable” outlook in the Triple-A rating in 2010.

Public debt was put at 76.5% of GDP.  The country’s imports of natural resources has been on the rise and the financial meltdown and property crash was rather brutal for England.  There are taxation issues that are ongoing, a near-nationalization of aspects in banking to keep the banks from collapsing, a coming austerity measures, and rising debt and deficit spending that is trying to reverse.  The inherent risks and ongoing problems do pose a problem long-term.  The good news here is that by staying out of the Euro it still owns the rights to its own printing presses and it can print money to meet its obligations.

The United States

Perhaps the trickiest of Triple-A rating analysis is right in the backyard here in the United States.  The Triple-A ratings are there and the outlook is stable.  For a ratings agency to downgrade the United States, the argument would be that there is no such thing as a Triple-A rating.  The world’s biggest economy has a population of 310 million and GDP at about $14.72 trillion.  Currently, there are no issues from S&P or Moody’s on the Triple-A with a stable outlook… But.  It was in December 2010 that Moody’s noted that unless there are offsetting measures to the recent US tax agreement, the overall stimulus package will be “credit negative” for the U.S. and it noted that it increases the likelihood of a negative outlook on the US government’s “Aaa” rating during the next two years.  Public debt is not as high as some nations, but having an expected 58.9% of GDP tied up as debt when we have high deficits will make this figure radically higher in the coming years.

The question is not one of today but longer term.  New healthcare reform, a deep recession that led to nearly 10% official unemployment, inverted property values, massive deficit spending, massive military spending, and a need to update the infrastructure simply means that the finances are out of alignment.  Cutting government spending and higher taxation hurt growth, so there is a perpetual debate that is happening at a time of massive government stimulus while we have military in-theater at the same time.  Another huge risk is that the United States has a shorter debt-maturity schedule than it has historically and rising rates bring up the issue of the cost of debt servicing.  One last note on the United States and its Triple-A rating.  For a ratings agency to downgrade the United States, the argument will come up that no other nations are worthy of Triple-A rating either.

As a reminder, much of the data is on updated forecasts and may end up being slightly different.  These GDP figures are also all converted for dollars, and currency fluctuation can distort the final figures.  What is static is that some of the world’s great Triple-A ratings might not be as riskless as many investors believe.

JON C. OGG

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