Fitch writes in its newly released report on sovereign debt that the rating agency expects downwards rating pressure to continue in Europe through 2010. The survey show that the downgrade/upgrade ratio last year turned negative for the first time since 2002, and for some local governments the tax revenue shrunk by 20 percent.
“Fitch expects higher overall deficits to continue into 2010, and in some cases this will be at the operating balance level.”
The global recession left a lasting impact on sovereign nations as well as local and regional authorities, faced with shrinking revenues and bulging deficits. As a result, the international public finance downgrade to upgrade ratio turned negative in 2009, with downgrades outpacing upgrades by 1.6 to 1, Fitch Ratings writes in the newly released “International Public Finance 2009 Transition and Default Study”.
Last time the downgrade/upgrade ratio was negative, was in 2002, the report shows:
“The global recession left a lasting impact on sovereign nations as well as local and regional authorities, faced with shrinking revenues and bulging deficits. Despite these recent economic difficulties, the rate of downgrades among Fitch-rated international public finance issuers remained relatively modest in 2009, edging lower to 4.2% from 5.2% in 2008. Upgrades however contracted to 2.6% from 8.7% a year earlier. As a result, the international public finance downgrade to upgrade ratio turned negative in 2009, with downgrades outpacing upgrades by 1.6 to 1, up from positive results of 0.6 to 1 recorded a year earlier,” Fitch writes in the report.
The Pressure Is On Europe
Fitch’s international public finance coverage is weighted heavily with European issuers and therefore the sector’s outlook as discussed in the survey is greatly influenced by Fitch’s expectations for Europe.
Fitch believes downward rating pressure will continue in Europe in 2010, either through rating downgrades for those entities that the agency considers to have long-term structural problems, or through continued revisions of Rating Outlooks to Negative.
“These are mainly sub-nationals that have a greater reliance on fiscal revenue related to economic activity in their territory, such as personal income tax, corporate income tax, or value-added tax; or taxes related to property transactions, such as stamp duty. The continued weak economic environment will result at best in a modest rise in tax revenue compared with 2008, or at worst in a decline, as experienced by a number of sub-nationals in 2009 ⎯ some registering declines in tax revenue of up to 20%.”
“In addition, capital expenditures will remain high as these entities adopt anti-cyclical measures to boost economic activity, in parallel with policies adopted by various central governments. Therefore, Fitch expects higher overall deficits to continue into 2010, and in some cases this will be at the operating balance level, as some sub-nationals have found it difficult to rein in operating expenditures.”
Geographically, Europe not only accounted for the preponderance of assigned international public finance ratings, but also for all Fitch’ rating actions in 2009.
Western and Eastern Europe split downgrades with a total of four each, while the eastern half of Europe alone captured all five upgrades for the year.
“Ukraine recorded the most downgrades with three, the result of the country’s sovereign downgrade in November; the cities of Kyiv, Odessa, and Kharkov received downgrades to ‘B−’ from ‘B+’. On the upside, two Turkish issuers, the Metropolitan Municipality of Istanbul and Toplu Konut Idaresi Baskanligi moved up the rating scale to ‘BB+’ from ‘BB−’, again on a sovereign rating action, this time the upgrade for Turkey (‘BB+’).”
No Defaults, Yet
Fitch Ratings recorded no defaults on public debt in 2009.
The last default of Fitch rated international public finances was in 2007.
Here’s the rating agency’s official default list:
Republic of Sakha (Yakutia): The republic defaulted on domestic bonds, August 1998.
City of Odessa: The city of Odessa failed to repay its UAH61 million municipal bond and interest (UAH30 million), June 1998.
City of Buenos Aires: The city missed an interest payment on its euro medium-term note program (EMTNs), May 2002.
Province of Buenos Aires: The province defaulted on debt-service payments of its EMTNs in the amount of USD25.5 million, January 2002.
Province of Santiago del Estero: The province defaulted on debt-service payments due on provincial consolidated debt, February 2002.
Province of Tucuman: The province defaulted on debt-service payments due on provincial consolidated debt, February 2002.
Province of Mendoza: The province missed a bond interest payment of USD12.5 million, March 2002.
Province of San Juan: The province missed a bond interest payment of USD5.035 million on its 13.25% federally guaranteed bonds, July 2002.
City of Taranto: The city missed a debt installment repayment, January 2007.
Here’s a copy of the full report: “International Public Finance 2009 Transition and Default Study”
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