— Eoin Clarke (@DrEoinCl) April 22, 2014
— Eoin Clarke (@DrEoinCl) April 22, 2014
The top chart below shows the current yields on 10-year sovereign debt for some of the largest economies in the world. In this chart we have also highlighted (in red) each G8 country to show where the yields on their long-term debt stand relative to the rest of the world. Not surprisingly, most of the G8 countries have yields that are at the lower end of the spectrum. Outside of Russia, which has its own country specific issues, the ten-year yields of the remaining seven countries are all in the bottom ten positions. Japan currently has the lowest 10-year yield at a level of 0.61%, while Brazil has the highest with a yield of 12.6%!
Perhaps the most surprising aspect of current ten-year yields is that borrowing costs in the US are only the eighth lowest of the 24 countries shown. US treasuries were once considered the safest of all fixed income investments. Today, ten-year yields in the US are more than 100 basis points (bps) higher than ten-year yields in Germany and just 50 bps lower than 10-year yields of Spanish debt. With regard to Spain, it was less than two years ago that there was a widespread concern over whether or not Spain would even be able to remain in the Eurozone!
While 2014 was a year where fixed income was once again supposed to underperform equities, so far the opposite has been the case. In practically every major country, long-term sovereign debt yields are lower now than they were three months ago meaning that the prices of the bonds have risen. As shown in the lower chart below, of the 24 major countries highlighted, the yields on ten-year debt have fallen for all but six countries, and outside of the Philippines and India, the increases in yields over the last three months have been less than ten bps.
Based on latest polling figures, Fitch Ratings expects a ‘no’ vote in September’s referendum on Scottish independence. However, the implications of a possible ‘yes’ vote for the residual UK (England, Wales and Northern Ireland) still merit closer analysis given there would be additional, albeit moderate risks for the UK’s public debt, external finances, currency arrangement and banking sector.
A ‘yes’ vote would be followed by a transition period, where many details would need to be agreed ranging from political and legal issues to economics, finance and trade. We would expect the transition to be managed carefully, avoiding financial dislocations. Fitch would review the UK’s rating (AA+/Stable) and our rating response would depend on the terms of the agreement between Scotland and the UK.
In a preliminary assessment in October 2012, we commented that Scottish independence would probably be neutral for the UK’s (then ‘AAA’) rating. However, this assumed no impact on gross public debt – something that now looks very unlikely. The UK government has recently stated that in the event of Scottish independence, it would in all circumstances honour its issued stock of UK debt. This would lead to a one-off increase of 9.5% of GDP in the UK gross public debt ratio as Scotland was stripped from UK GDP from 2016.
As we have previously emphasised, the UK’s gross debt ratio will need to be lower than its current level and steadily declining before any upgrade back to ‘AAA’; a prospect that would be delayed by such a debt shock. >> Read More
Moody’s Investors Service has today downgraded Ukraine’s government bond rating to Caa3 from Caa2. The outlook on the Caa3 rating is negative.
The downgrade is driven by the following three factors, which exacerbate Ukraine’s more longstanding economic and fiscal fragility:
1.) The escalation of Ukraine’s political crisis, as reflected by the recent regime change in Kiev as well as the annexation of Crimea by Russia (Baa1, on review for downgrade).
2.) Ukraine’s stressed external liquidity position, in light of a continued decline in foreign-currency reserves, the withdrawal of Russian financial support and a rise in gas import prices. This assessment accounts for the near-term liquidity relief that the recently agreed IMF staff-level agreement will provide.
3.) The decline in Ukraine’s fiscal strength, with an expected increase in the debt-to-GDP ratio to 55%-60% by the end of 2014 (from 40.5% at year-end 2013) due to a sizable fiscal deficit, a significant GDP contraction and a sharp currency depreciation.
Concurrently, Moody’s has also downgraded to Caa3 from Caa2 the rating of the Ukrainian State Enterprise “Financing of Infrastructural Projects”. The outlook is negative in line with the outlook on the sovereign rating. The enterprise’s debt is fully and unconditionally guaranteed by the government of Ukraine.
In Moody’s assessment, the recent developments in Ukraine and the resulting material changes to sovereign creditworthiness necessitate this rating action being released on a date not listed for this entity on Moody’s 2014 sovereign release calendar published, in accordance with EU Regulation 462/2013 (“CRA”). >> Read More
For example, if you’re talking about government debt, then it’s important to understand the nature of the debt. Is it in the government’s own currency that they can freely print (like Japan, the US, and UK)? How much of the debt is external. When looking at private sector debt, financial debt can complicate the picture (so a country like the UK ends up looking like it uses much more debt than it does, simply because finance is a bigger part of the economy).
This chart from Citi looks simply at household and non-financial sector debt by key regions around the world.
You can see how China’s private sector debt has surged past everyone, nearing 200% of GDP. >> Read More
Fitch Ratings has affirmed the United States of America’s Long-term foreign and local currency Issuer Default Ratings (IDR) at ‘AAA’ with Stable Outlooks. The ratings on senior unsecured foreign and local currency bonds have also been affirmed at ‘AAA’. The Country Ceiling has been affirmed at ‘AAA’ and the Short-term foreign currency IDR at ‘F1+’.
This rating action resolves the Rating Watch Negative (RWN) on which the ratings were placed on 15 October 2013, in line with Fitch’s previous guidance that this would take place by end-March.
KEY RATING DRIVERS
The affirmation at ‘AAA’ with a Stable Outlook and resolution of the RWN reflects the following key rating drivers and their relative weights:
The federal debt limit was suspended in mid-February in a timely manner and in a way that avoided casting uncertainty over the full faith and credit of the US, in contrast to the crises in August 2011 and October 2013. The suspension is in place until 15 March 2015, beyond which the seasonality of tax payments and use of extraordinary measures might allow the Treasury to fund the government until around July 2015. >> Read More
Fitch Ratings has revised the Outlook on Russia’s Long-term foreign and local currency Issuer Default Ratings (IDR) to Negative from Stable and affirmed the IDRs at ‘BBB’. The issue ratings on Russia’s senior unsecured foreign and local currency bonds have also been affirmed at ‘BBB’. The Short-term rating has been affirmed at ‘F3′ and the Country Ceiling at ‘BBB+’.
Under EU credit rating agency (CRA) regulation, the publication of sovereign reviews is subject to restrictions and must take place according to a published schedule, except where it is necessary for CRAs to deviate from this in order to comply with their legal obligations. Fitch interprets this provision as allowing us to publish a rating review in situations where there is a material change in the creditworthiness of the issuer that we believe makes it inappropriate for us to wait until the next scheduled review date to update the rating or Outlook/Watch status. The next scheduled review date for Fitch’s sovereign rating on Russia was 25 July 2014, but Fitch believes that developments in Russia warrant such a deviation from the calendar and our rationale for this is laid out below.
KEY RATING DRIVERS
The rating actions reflect the following key rating drivers and their relative weights: >> Read More
While the US may be rejoicing its daily stock market all time highs day after day, it may come as a surprise to many that global equity capitalization has hardly performed as impressively compared to its previous records set in mid-2007. In fact, between the last bubble peak, and mid-2013, there has been a $3.86 trillion decline in the value of equities to $53.8 trillion over this six year time period, according to data compiled by Bloomberg. Alas, in a world in which there is no longer even hope for growth without massive debt expansion, there is a cost to keeping global equities stable (and US stocks at record highs): that cost is $30 trillion, or nearly double the GDP of the United States, which is by how much global debt has risen over the same period. Specifically, total global debt has exploded by 40% in just 6 short years from 2007 to 2013, from “only” $70 trillion to over $100 trillion as of mid-2013, according to the BIS’ just-released quarterly review.
It should come as no surprise to anyone by now, but the only reason why global stocks haven’t plummeted since the Lehman collapse is simple: governments have become the final backstop for onboarding risk, with a Central Bank stamp of approval – in other words, the very framework of the fiat system is at stake should global equity levels collapse. The BIS admits as much: “Given the significant expansion in government spending in recent years, governments (including central, state and local governments) have been the largest debt issuers,” according to Branimir Gruic, an analyst, and Andreas Schrimpf, an economist at the BIS. >> Read More
The crisis in the Ukraine has increased the risks to Russia’s already weakening economy presented by currency depreciation and capital flight, Fitch Ratings says. The situation is still highly unpredictable but Russia’s sovereign credit profile is robust and events so far do not have implications for the country’s ‘BBB’ rating.
Market reaction to Russia’s intervention in Crimea saw the rouble fall 2.2% to an all-time low against the US dollar on Monday, while the MICEX index of Russian shares fell 10.8% and yields on rouble sovereign debt rose sharply. The Central Bank of Russia (CBR) raised its key interest rate by 150bp to 7%, and intervened to support the rouble, selling USD11bn. Losses were partly recovered on Tuesday as tensions appeared to ease.
The rouble has now fallen around 9% against the dollar this year, partly driven by fears across emerging markets about the impact of US tapering, but also on Russia-specific concerns about low growth and the weakening current account surplus, and in anticipation of further liberalisation of the exchange rate regime. >> Read More