Sovereign credit quality has deteriorated since Auguist 2008, says rating agency Standard & Poor's. The article, which is titled "Sovereign Ratings Sag Under The Global Economic Strain," says that the symptoms of the deterioration are the large assumptions of private-sector debt and the issuance of broad financial-sector guarantees.
The source of deterioration has, in our view, been the build up of external and financial sector imbalances over decades.
We believe that recapitalisations of financial systems will almost inevitably lead to step rises in government debt. In addition, we see private-sector deleveraging of economies--in combination with the reduced effectiveness of monetary policy--deepening the global recession.
The recession, in turn, will likely depress government revenues and increase expenditures - not only from the effect of automatic stabilisers but also from stimulus packages.
For many sovereigns, we see real interest rates rising as investors demand higher risk premiums for their debt investments and, if nominal interest rates fail to adjust sufficiently, as inflation subsides in tandem with falling domestic demand.
These prospects have led Standard & Poor's to lower 19 sovereign ratings since August 2008. Of our 123 sovereign ratings, 28 currently have a negative outlook, and only two have a positive outlook.
Either at the high end or the rating scale or at lower levels, the sovereigns that preserve their credit standing will, we believe, be those that take steps to improve their economic competitiveness, stabilize their cyclically adjusted debt trajectories, maintain the credibility of their monetary policies, and address the contingent risks their financial sector and public enterprises pose.