Introducing The Weiss Sovereign Debt Ratings

by Martin D. Weiss, Gavin Magor, and Melissa Gannon | April 28, 2011

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Executive Summary:

Weiss Ratings is an independent rating agency, covering 19,000 U.S. banks, credit unions and insurance companies, with the primary mission of protecting the public from financial risks without bias or conflicts of interest. With that mission in mind, we see an urgent need to unambiguously warn of growing risks related to investing in the United States and various other nations. Therefore, we are initiating coverage of their sovereign debts.

We believe that the AAA/Aaa assigned to U.S. sovereign debt by Standard & Poor’s (S&P), Moody’s and Fitch is unfair to investors and savers, who are undercompensated for the risks they are taking. An honest rating for U.S. government debt is urgently needed to help protect investors and support the collective sacrifices the U.S. must make in order to restore its finances.

In the Weiss ratings scale, ranging from A (excellent) to E (very weak), only sovereign countries with stellar scores in four major areas — debt burdens, international stability, economic health and market acceptance — merit a grade of A- or better. Meanwhile, on the low end of the scale, only countries that demonstrate severe and/or consistent weaknesses in those four areas receive a grade of D+ or lower. Currently, the data show that the U.S. government does not fall into either category: It ranks 44th in terms of its debt burden, primarily because of its large deficits; 32nd for international stability, due mostly to low reserves; and 27th for economic health because of recent boom-and-bust cycles. Helping to partially offset these low scores, however, the United States ranks 6th for its ability to borrow in the global marketplace, helping to raise its final grade to C and its overall ranking to 33rd.

The C rating signals that the current fiscal condition of the United States government is far inferior to that implied by its AAA/Aaa rating from other agencies. At the same time, it means that the U.S. retains enough borrowing power in the marketplace to give it the opportunity to take remedial steps. Still, there are grave risks for policymakers and investors, including the possibility of a vicious cycle that includes severe declines in U.S. bond prices and the U.S. dollar.

Although our opinion of U.S. sovereign debt contradicts the AAA/Aaa rating assigned by the U.S. credit rating agencies, it is supported by a large body of new research published by governmental and international organizations. Moreover, in creating its sovereign debt ratings, Weiss Ratings ensures fairness by avoiding conflicts of interest and focusing exclusively on objective, quantifiable criteria without cultural or political bias.

The newly-released ratings for the 47 sovereign nations currently covered by Weiss Ratings, along with an explanation of each grade level, can be found on pages 14 and 15.

 

Introducing the Weiss Sovereign Debt Ratings

Weiss Ratings is an independent rating agency, covering 19,000 U.S. banks, credit unions and insurance companies, with the primary mission of protecting consumers and investors from financial risks without bias or conflicts of interest.

Thanks largely to this objectivity, we have provided timely warnings to consumers and investors of future financial difficulties, while the value of our research has been recognized by the U.S. Government Accountability Office (GAO), the U.S. Senate, the U.S. House of Representatives, and the financial media.

On several occasions, our ratings have helped fill a void created by inherent biases in the opinions of credit rating agencies. For example, in the early 1990s, Weiss identified severe weaknesses among large life and health insurers that were given stellar ratings by the leading rating agencies but subsequently failed. Similarly, prior to the debt crisis of 2008-2009, our ratings warned of severe weaknesses among major banks that received top grades from other agencies, but later failed or required a federal bailout. At the same time, our top grades have also accurately identified the truly strong companies with the resources to survive the most adverse economic conditions. 1

Today, we see a similar void in the realm of sovereign nations, along with an urgent need to unambiguously warn the public of growing risks. Therefore, we are initiating coverage of sovereign debts.

With this report, we are releasing our ratings on 47 nations, while focusing our commentary primarily on our ratings model and issues concerning the rating of the United States government. We will provide further commentary on the ratings of other nations in subsequent reports.

 

Weiss Ratings Has Initiated Coverage on the U.S.
and other Sovereign Nations for Seven Key Reasons

We believe that:

1. The AAA/Aaa assigned to U.S. sovereign debt by S&P, Moody’s and Fitch is fundamentally unfair to investors in U.S. government securities. It fails to warn of real dangers, and it helps create market conditions in which they are severely undercompensated for the real risks they are taking. Investors urgently need an alternative reference point.

2. The AAA/Aaa U.S. debt rating is also unfair to savers and investors who rely on interest income to help meet their daily living expenses or finance their retirement. Since nearly all U.S. interest rates — including rates on bank CDs, annuities and other instruments — are tied to U.S. Treasury yields, these savers and investors are also being underpaid.

3. Recent commentary issued by the leading credit rating agencies regarding the future of their AAA/Aaa rating of U.S. sovereign debt is ambiguous and unclear. As long as they continue to reaffirm the AAA/Aaa, any warnings they might issue are inadequate to protect investors.2

4. The AAA/Aaa U.S. debt rating is unfair to other sovereign nations that receive inferior ratings despite superior fiscal circumstances. Many have made the national sacrifices — and/or achieved the economic successes — which demonstrate a higher capacity to service and repay their debts. Yet, due to their relatively lower grades from the leading U.S. ratings agencies, they are often punished for their accomplishments by a marketplace that demands higher interest rates. For this reason as well, an objective alternative is long overdue.

5. The AAA/Aaa U.S. debt rating has continually fostered political resistance and gridlock in Washington. If an appropriate rating had been issued years ago, it could have played a pivotal role in helping lawmakers and policymakers take earlier remedial steps. However, looking forward, there is no better time than now to confront the nation’s financial challenges with honesty.

6. The AAA/Aaa U.S. debt rating has also helped create an environment of chronic public complacency. Many institutional and individual investors, who, in other circumstances, might demand greater fiscal discipline, have been largely content to accept the U.S. government’s fiscal decline. At the same time, efforts to educate voters about the importance of more prudent fiscal policies have typically fallen on deaf ears. Today more than ever, an honest and fair rating for U.S. government debt is urgently needed to help provide public support for the political compromises and collective sacrifices the U.S. must make in order to restore its finances.

7. Fair, honest and transparent ratings can also help prod governments of other countries to take needed remedial steps to improve their finances. Japan, for example, which has the largest public debt per GDP among all industrialized nations, shares with the United States and Europe a responsibility to provide better fiscal leadership globally.

 

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1 According to the U.S. Government Accountability Office (GAO), Weiss was first to warn of future financial difficulties at U.S. life and health insurers three times more often than its leading competitor. (See http://archive.gao.gov/t2pbat2/152669.pdf.) Separately, in the banking sector, since 1990, Weiss Ratings has issued grades on 1,533 banks that subsequently failed. On nearly 90% of those banks, Weiss issued a rating of D+ or lower at least one year ahead of time. On approximately 10% of the banks that failed, Weiss issued a rating of C+ or lower at least three months before the failure.

2 On May 10, 2010, Weiss Ratings challenged Standard & Poor’s, Moody’s and Fitch to downgrade the sovereign debt of the United States, based on the principle that “recognizing and confronting our nation’s financial troubles with honesty is the necessary first step toward solving them.” Today, despite public comments about the growing risks, they have yet to take that step. See http://www.weissratings.com/news-releases/general-2010-05-10.html.