Lecciones de un downgrade
La historia sugiere que un downgrade y el que US pierda el AAA no sera la tragedia que todos esperan.
Japon, Canada y Australia lo han sufrido y la reaccion ha sido negativa pero no es el fin del mundo. A largo plazo puede ser positive para US si los politicos se ven forzados a disciplinar la politica fiscal.
Lo mas importante no es el stock market si no los fundaments de la economia.
MARKETSJULY 30, 2011
Lessons of Lower Ratings
By TOM LAURICELLA
With the U.S. flirting with default and a credit-ratings downgrade, investors are once again in uncharted waters.
But while a default by a country with the global position of the U.S. would likely wreak havoc on financial markets, history suggests that losing a triple-A credit rating may not bring with it the big market disruptions that some fear.
Japan, Canada and Australia, among others, have suffered the ignominy of being downgraded from top credit ratings.
By and large, borrowing costs remained fairly steady and, in some instances, eventually declined. Stock markets wavered but generally rebounded, while the response in currency markets varied widely.
"When [a downgrade] happened in the past, was it the end of the world?" asks Nick Bennenbroek, head of currency strategy at Wells Fargo & Co. "The reaction wasn't positive, but it wasn't extreme."
For the U.S., history suggests the outcome could even be a long-term positive if a downgrade prods policy makers to get the government's fiscal house in order.
While circumstances and economic paths differed, the impacts of the ratings change itself weren't significant, analysts say. One reason is that ratings changes are usually well-advertised in advance, allowing markets to adjust gradually. But more important for the markets than the ratings moves, analysts say, are the country's underlying economic trends.
At AllianceBernstein, senior portfolio manager Ivan Rudolph-Shabinsky has looked at the history of sovereign ratings downgrades—and their impact on bond markets—going back to 1990. He found that when sovereign ratings were lowered by one notch from triple-A—as many in the market now think is likely for the U.S.—bond yields "barely changed."
It is a different story when countries are downgraded to lower ratings, such as to a single-A rating or nearing "junk" territory. When the downgrade is to lower-tier ratings, the impact on interest rates has often been "significant," Mr. Rudolph-Shabinsky found.
A U.S. downgrade would be a special case. Around the world, U.S. Treasury debt is the most widely held investment, with huge chunks owned by other nations such as China and Japan. That is also unlike Japan, whose government bonds are largely domestically held. Also, the U.S. dollar is the currency most commonly used for transactions and savings. Both are treated as safe-haven investments.
With those caveats, investors searching for parallels still turn mainly to the experience of Japan and Canada.
In 1998, Moody's Investors Service downgraded Japan from its top rating of Aaa to Aa1. As some think could happen with the U.S., that downgrade wasn't immediately matched by other ratings companies.
Standard & Poor's kept Japan at its highest rating of triple-A until February 2001, when it downgraded the country one notch to double-A+.
On the day of the 1998 downgrade, the yen fell 0.7%, according to data compiled by Wells Fargo. Three months later, the yen was up 1.1% from before the downgrade, and six months later, the yen was 2.7% lower.
Meanwhile, the response of Japanese stocks and government bonds on the day of the downgrade was "fairly muted," says Barclays Capital strategist Barry Knapp. The Nikkei stock index was down 2% one month later. "What really mattered more [than the downgrade] were the macro-economic issues of the day," he says.
In the case of Japan, the Moody's downgrade came as the country was coming out of a recession and on the day that the U.S. Federal Reserve cut interest rates in response to the crisis spilling out of hedge fund Long Term Capital Management, Mr. Knapp notes. Two weeks after the Moody's downgrade, Japanese stocks were higher. And while Japanese government-bond yields did move higher in the following months, Mr. Knapp says that move had more to do with a nascent economic recovery.
Dimitri Dellis, a bond-market strategist at BMO Capital Markets, notes that, following the 2001 downgrade by S&P, yields on 10-year Japanese debt actually were 0.24% lower the following week.
"The fact that you go from AAA to AA+ doesn't mean rates will go higher," says Mr. Dellis.
Canada, too, suffered a multiple-stage downgrade over a period of several years, and analysts note that its finances at the time were in comparable shape to those in the U.S. today.
In October 1992, when S&P cut Canada's foreign debt rating by one notch from triple-A, there was little impact on Canadian markets. But when Moody's followed in 1994, 10-year note yields rose 0.45% over the next month and stocks fell 6%, according to data compiled by RBC Capital Markets.
Then, in April 1995, Moody's downgraded Canada's key sovereign rating by one notch from Aaa. That day, there was little reaction in the bond, stock or currency markets.
But the calm didn't last long, says Chris Orndorff, a portfolio manager at Western Asset Management. The gap between U.S. and Canadian 10-year bonds rose to 1.88 percentage points over four months from 1.30 percentage points, according to Western.
Prodded in part by the ratings downgrade, Canada enacted strict budget reforms, and the bond market reversed course. By November, 10-year yields were even with the U.S., Mr. Orndorff notes.
"They really got serious" about balancing their budget, he says. And at that point, "markets can move quickly," Mr. Orndorff says.
There have been other examples, where the market response was more dramatic. When Sweden suffered a banking crisis and recession, its downgrade from triple-A status in 1991 saw the krona lose 11.4% over the next six months, Wells Fargo says. But Australia's 1986 downgrade was followed by a 12.6% rally in the Australian dollar.
Still, it took until 2002 and 2003 for Australia to recover the top credit ratings from Moody's and S&P.
"The AAA credit rating is very hard to recover once it has been lost," says Peter Costello, who as Australia's treasurer from 1996 to 2007 is credited with pursuing the fiscal consolidation that restored the nation's top credit rating.
"The message is to never lose the status in the first place," he says.
—Enda Curren, William Sposato and Natasha Brereton
contributed to this article.
Write to Tom Lauricella at
tom.lauricella@wsj.com