Standard and Poor's appears behind the curve on Portugal and Spain

The return to economic growth and the gradual progress on ameliorating budget deficits to cap excessive debt burdens have seen Spain and Portugal’s risk profiles improve substantially this year.

Upgraded scores from economists and other country-risk experts have seen Spain, on 57.0 out of 100, climb 11 places to 45thout of 186 sovereigns in the global rankings. Portugal, scoring 54.5, has climbed 12 places to 52nd, with no other country outside the highest default risk category – ECR’s tier five – experiencing such a large shift.

Reflecting this, Spanish 10-year bond yields, down to 2.64% on Wednesday (from 4.14% at end-2013), are equivalent to comparative UK debt. Portuguese yields have fallen to 3.46% from 6.04%. CDS premia have similarly tightened.

The rating agencies have slowly cottoned on, but S&P is still trailing the field. Its upgraded BBB rating of Spain is stable, unlike Moody’s equivalent on review for an upgrade. Fitch, meanwhile, has Spain even higher on BBB+.

Although correctly falling within the BB+ to A- range associated with the third of the five categories into which ECR divides up its sovereign universe, Spain’s risk indicators suggest it should be rated A- on a par with Slovenia – lying 43rd on the scale – with barely a point between them.

Latvia, too, some five places and one-and-a-half points below Spain, is similarly rated A- by S&P.

Portugal, assessed BB (negative) by S&P, receives a lower credit rating than Turkey, one place higher on the ECR scoreboard, but commanding almost an identical score. South Africa, some three places and a point lower than Portugal, is rated BBB- (albeit on review for a downgrade).

Fiscal metrics are a little better, but Spain perhaps has the edge. Portugal’s deficit was smaller than Spain’s in 2013 (4.9% of GDP vs 7.1%), but its debt larger (129% of GDP vs 93.9%), and constitutional court rejections of austerity measures add additional political risks to the budget process, endorsing Portugal’s lower rating vis-à-vis Spain.

Doubts persist, of course, regarding Portugal and Spain’s other macro-indicators, not least in terms of current-account dynamics, with both countries running larger trade deficits in Q1 2014 compared with levels a year earlier. Competitiveness gains, too, have faded somewhat with wage growth reappearing.

Constantin Gurdgiev, adjunct professor of finance at Trinity College Dublin, acknowledges these shortcomings and is keeping a level head concerning the eurozone periphery fight-back.

Nonetheless, he argues: “Spain is closer to A- than Portugal [especially as] economic recovery is gaining strength in Spain with Q1 2014 real GDP growth coming in at 0.4% quarter on quarter, against 0.2% for the euro-area as a whole – a third consecutive quarter of expansion.”

This article was originally published by ECR. To find out more, register for a free trial at  Euromoney Country Risk.