Credit rating companies are distorting capital markets by assigning the same debt ranking to countries from Italy to Thailand and Kazakhstan, according to BlackRock Inc., the world’s biggest money manager.
While 23 countries share the BBB+ to BBB- levels assessed by Standard & Poor’s, the lowest investment grades, up from 15 in 2008 at the beginning of the financial crisis, their debt to gross domestic product ratios range from 12 percent for Kazakhstan to 44 percent for Thailand and 126 percent for Italy, International Monetary Fund estimates show. The cost of insuring against a default by Italy, ranked BBB+, over the next five years is almost triple that for Thailand, which has the same rating.
BlackRock started compiling its own Sovereign Risk Index to measure countries’ creditworthiness in June 2011. The latest quarterly update in October rates Spain, Ireland and Italy similar to Argentina and Venezuela, among the 10 most risky countries. S&P puts Argentina, which defaulted on its debt in 2001, at B-, six levels below Spain. Venezuela is B+, six grades below Italy and Ireland.
The review by Moody’s of its rating performance since 1983 shows that the system has proven to “powerfully” rank-order sovereign default risks, according to the company’s Dec. 17 report. No government has defaulted on its debt within a year of holding an investment-grade rating, according to the report. Countries rated Caa and C, the lowest ranking, had a default rate of 28 percent, compared with 0.6 percent among those in the Ba category, which is the highest speculative grade, the report said.
After S&P cut its rating on U.S. debt to AA+ from AAA in August 2011, John Bellows, then acting assistant secretary for economic policy at the U.S. Treasury, spotted what he thought was a mistake in S&P’s math. There was no “justifiable rationale” for the downgrade, Bellows wrote on a Treasury blog post. S&P said its decision wasn’t affected by the “change of assumptions.”