Sovereign Ratings’ Convoluted Convergence Convocation
The relative developing-industrial market government re-rating in debt repayment ability over time to overlapping agency grades and instrument spreads has been summarized by JP Morgan’s periodic comprehensive asset class update also suggesting intersection in previously distinct political and social indicators. It finds that less than 20 percent of global GDP has AAA status compared with half in 2007 after a “torrent” of developed country downgrades especially in Europe, while EM sovereigns had over 180 upgrades for the period. The latter and fallen Eurozone members have the same BBB in the “jammed” space that includes Ireland, Italy and Spain along with Brazil, Indonesia, and Russia. Over the past 5 years advanced economies’ debt burden has increased by 35 percent, which has been the steady public sector ratio to output for the emerging universe. In 2012 Indonesia, Latvia and Uruguay were promoted to investment grade, while the Mideast and Europe regions have moved in the opposite direction. Most components of the 3 major local, external and corporate bond indices have reached the high-quality threshold, and the US top-grade and EMU benchmarks are only slightly ahead. The work points out that the gap may persist with divergent scores on institutional and governance categories but that they are likewise narrowing and post-crisis slippage has come more from established capitalist democracies. Asia represents one-third of the ten “doing business” leaders on the World Bank’s list, while France and Germany rank behind. The Transparency International average is half the developed market 7.2 but Iceland, Greece, Italy, Austria and the UK showed outsize deterioration, while peripheral Europe generally tumbled on freedom and openness readings. Social inclusion as measured by the Bertelsmann Transformation Index’s poverty, inequality and safety net elements displays overall gains except for the poorest economies, although over 50 countries present notable political risks with a crowded election calendar over the coming months.
Big sovereign wealth funds in Asia and the Gulf also disclose more with assets under management across the spectrum estimated at near $5 trillion. Their holdings exceed hedge funds and private equity and are about half of official foreign exchange reserves, according to the analysis. The top ten control 80 percent of the pool and reflect commodity and trade inflow accumulations that may slow toward mid-decade, as they face additional demands for domestic rather than cross-border allocation for infrastructure and financial sector support. Long-term “stabilization” versions as classified by the IMF retain 90 percent fixed-income preference which should directly translate into further EM exposure as domestic pension and insurance providers also expand. Latin private pension accounts amount to $650 billion and Europe is fostering second pillar schemes as Asia’s life insurance industry half in mainland China and Taiwan deploys almost $2.5 trillion in savings for regional bond longevity.
