The rating agency’s upgraded assessments still seem out of line with improving Euromoney Country Risk survey data, market indicators and its own ratings for other sovereigns.
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.