JEDDAH – Sovereign governments have begun to see some tentative early ?signs of recovery, but that the bad news is not only in the rear-view ?mirror., Moody’s Investors Service said in a new report on Tuesday.
In the report titled “Are Sovereigns on the Road to Recovery?”, Moody’s pointed out that many governments will need to undergo ?lengthy balance sheet restorations even when the worst of the global ?recession is behind them.??
The ratings agency’s special report - one in a series examining the ?topic across nations and industries - said that any downward sovereign ?rating actions over the next several months will likely have been ?indicated already by negative outlooks now in place. The report also ?focuses on the indispensable role of central government action in the ?current healing process.??
“If stage one of global turmoil was the banking and financial crisis and ?stage two was the economic crisis, the current phase - stage three - ?can be described as an ongoing crisis in public finances,” said Moody’s ?senior vice president Kristin Lindow, the main author of the report. ?
“Governments have leveraged up their balance sheets to compensate for ?private sector deleveraging.”??
She predicted a sustained period of fiscal intervention was probably ?necessary until household and financial sector balance sheets are made ?healthy again, even as exit strategies to unwind such interventions are ?also beginning to be discussed publicly.
She explained that a long period ?of private-sector wealth restoration and savings accumulation is getting ?underway following the collapse in equity and other asset markets.??Moody’s May forecast of a “hook-shaped” recovery was made on the ?assumption that a steep economic downturn was not likely to be followed ?by an equally steep upturn, but rather a slow and painful convalescence, ?and this has proven accurate.??“On the other hand, a degree of optimism has returned recently to the ?financial markets, bolstered by the stimulative fiscal and monetary ?policies pursued by almost every government around the world for the past ?year or more,” said Lindow. “These signs have proliferated, though mixed ?with not-infrequent pieces of bad news.”??
Most of Moody’s rating actions over the last nine months - including ?outlook changes - have been in the downward direction with most of these in Europe. Still, the rating agency has so far avoided wholesale ?sovereign rating downgrades, sticking to the practice of lowering ratings only when a government has dropped out of its ordinal ranking and its ?balance sheet and economic model are impaired in a way that is likely to ?last.??
Upward rating momentum has been seen mainly outside of Europe, with?positive rating actions taken in Latin America, including Chile, Uruguay and Brazil, as well as in Asia (Philippines, Indonesia), and the Middle East (Lebanon).??“Our upgrades reflect the resilience of these countries,” said Lindow. ?
“We are also examining other countries closely to determine whether their performance under fire indicates that they too deserve upgrades.”??
Lindow said that a major risk to sovereign credits is the possibility of much higher real interest rates. She said that such a scenario could ?spell more rating downgrades across the sovereign rating scale in the ?medium term, especially given how far countries’ shock absorption ?capacity has already been eroded.??
In Moody’s view, even those countries that have to unwind quantitative ?easing strategies will not be at risk of high inflation given how large ?the output gaps are at present and how long it will take to close them at ?below-par growth rates.??
“The bottom line for sovereigns is that their economic convalescence will ?proceed at varying speeds depending on the country. For the most-affected ?governments, the road to recovery will be rather long and not without ?risk,” Lindow said.??