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On the Verge of Regaining Investment Grade Status by… 2020

The importance of sovereign ratings cannot be overstated enough as they define the cost of funding not only for the public sector but also for the vast majority of domestic corporate and financial institutions via their impact on sovereign rating ceiling. Furthermore, rapid downgrades of the sovereign credit quality can –as we know all too well in Greece- lead to the exclusion of the sovereign from the global funding markets.

For all these reasons, understanding the mechanics and the factors affecting sovereign ratings assigned by major rating agencies is of particular interest for both macroeconomic analysis and investment allocation purposes.

Responding to that need we developed last year and we update now our Global Sovereign Ratings Model. The Global Ratings Model was developed in order to allow us to identify cases of substantial sovereign ratings dislocation i.e. instances where actual ratings assigned by rating agencies deviated substantially from our own model-implied rating assessment. Based on our results out of a total sample of 124 countries we rate, 78 have the “correct” rating (in the sense that our model implied rating matches that of Moody’s), 13 are given a rating “premium” by Moody’s vs our fundamental rating and 33 are rated more conservative that what their fundamentals imply.

Furthermore, given our special interest in the Greek economy, we are able to identify a wide gap between our model-implied rating for Greece vis-à-vis Moody’s. In particular, Moody’s currently rates Greece in the Caa category while according to our model Greece has a 40% chance of being in the Ba range and a 37% chance of being a B rated credit. This “massive” distance between model-implied and Moody’s ratings serves only to highlight how much qualitative factors are holding back Greece’s official ratings.

This degree of overconservatism is likely to continue into the future as our model points to a continuous improvement in Greece’s implied rating. In order to be able to assess the future evolution of Greece’s sovereign rating we map our baseline macroeconomic scenario for the Greek economy into future rating projections. Provided that our macroeconomic scenario pans out, then Greece should be on the verge of regaining investment grade status by 2020.