Capital Markets

Global Credit Quality Continues Climb

Upgrades strongly outpaced downgrades in Europe, Latin America, and the Asia-Pacific region, according to Moody's, but in North America the picture...
Stephen TaubJuly 20, 2005

Global credit quality improved in the second quarter of 2005, according to Moody’s Investors Service. And if Federal Reserve chairman Alan Greenspan’s assessment of the economy holds true, credit quality will continue its climb as the year progresses, unless higher interest rates crimp growth.

Upgrades strongly outpaced downgrades in Europe, Latin America, and the Asia-Pacific region, reported Moody’s. In North America the picture is not as bright; positive and negative rating actions were fairly balanced.

Last quarter, the ratio of upgrades to downgrades worldwide stood at 1.53, up from 1.44 in the first quarter. Moody’s acknowledged, however, that some of this improvement reflects the new application of joint default analysis to government-related issuers in Europe. About 5.4 percent of the rated issuers were upgraded in Europe, while just 1.9 percent were downgraded; more than half the upgrades in Europe were the result of the JDA initiative.

At the end of June, 3.4 percent of issuers globally were on review for downgrade, while 2.2 percent were on review for upgrade, according to Moody’s. This suggests that improvements in credit may moderate in the next several quarters, the credit rating agency pointed out.

“Further upgrades in both Asia-Pacific and Europe are likely. but at a slower pace,” said Moody’s vice president Praveen Varma, in a press release, “as less than 3.5 percent of issuers in both regions were on review for upgrade at the end of June.”

Latin America also experienced an improvement in credit quality. In North America, however, last quarter about 3.3 percent of issuers were upgraded; an equal percentage were downgraded.

“North-American credit quality may see a slight deterioration in the next couple of quarters,” wrote Varma, since 4.4 percent of the issuers are on review for downgrade compared with only 1.8 percent on review for upgrade.

Both investment-grade and speculative-grade issuers enjoyed more upgrades than downgrades during the second quarter. Varma added, however, that going forward, investment-grade issuers are more likely to see a higher proportion of downgrades to upgrades. Investment-grade issuers accounted for about 70 percent of all reviews for downgrade; reviews for upgrade were distributed roughly evenly between investment-grade and speculative-grade issuers.

Meanwhile, on Wednesday Greenspan gave Congress an upbeat forecast. “Our baseline outlook for the US economy is one of sustained economic growth and contained inflation pressures,” he said, reported the Associated Press. “In our view, realizing this outcome will require the Federal Reserve to continue to remove monetary accommodation,” he added, according to the wire service.

Translation: Expect more interest-rate hikes.