Not just developing world sovereigns either. From S&P today (emphasis ours):
Jan 12 - Standard & Poor’s Ratings Services today said it had placed its ‘AAA’ long-term foreign and local currency sovereign credit ratings on the Kingdom of Spain on CreditWatch with negative implications. A CreditWatch listing signals a potential but not inevitable change in a rating over the short term.
The ‘A-1+’ short-term ratings were affirmed.
“The CreditWatch placement reflects our view of the significant challenges facing the Spanish economy as it traverses a period of very weak growth, and a sustained period of deleveraging, which we expect to lead to a rebalancing toward traded sectors requiring real exchange rate depreciation,” Standard & Poor’s credit analyst Trevor Cullinan said.
In our opinion, the credit-driven nature of Spain’s strong growth performance in recent years has led to a build-up in imbalances, as evidenced by the sizeable current account deficit (around 10% of GDP in 2008). Due to the need for the private sector to restructure and deleverage balance sheets, we believe that the unwinding of the deficit increases the probability of a protracted economic slowdown… Despite a relatively strong starting position, we expect the Kingdom’s public finances to deteriorate markedly, with the general government deficit rising well above 3% of GDP until 2011, and peaking above 6% in 2009.
Now this is only a ratings watch action. No downgrade is necessarily forthcoming. It’s just a distinct possibility.
The spectre of which might go some way as to suggesting why CDS on a triple-A-rated sovereign should be a possibility. Something which has been discussed on FT Alphaville before.
Downgraded securities carry more onerous regulatory risk weightings under the Basel II ratings-based approach:
… unless you have a hedge in place. Such as a sovereign CDS.
That might go some way towards explaining why CDS contracts on Spain are some of the most heavily traded - and have the highest net notional levels - $13,489,091,873 according to the latest DTCC data.
Also up there with Spain: Italy. $158,198,385,126bn gross, $18,283,028,951 net.
If there are downgrades in the Eurozone, there could be some other rather nasty effects.
Related links:
Bonds that go bump… - FT Alphaville
Alors Jean-Claude! Voici le Crunch… - FT Alphaville
