SOVEREIGN CREDITS GET LESS-THAN- ROYAL TREATMENT / BARRON´S ( VERY HIGHLY RECOMMENDED READING )

WEDNESDAY, DECEMBER 9, 2009

UP AND DOWN WALL STREET

Sovereign Credits Get Less-Than-Royal Treatment

By RANDALL W. FORSYTH

But concerns over governments' finances actually should ultimately benefit the dollar -- and gold.

COUNTRIES DON'T GO BUST, the late Walter Wriston, Citibank's chief executive in the 1970s, famously declared. But that doesn't mean their deteriorating credit can't spook the global markets.

Only days after Dubai World debt's standstill was deemed a non-event, markets were roiled again Tuesday by downgrades and warnings about sovereign credits ranging from Greece to Great Britain and even the good, old U.S. of A.

Fitch Ratings cut its rating on Greece to triple-B-plus, three notches above junk, but maintained its negative outlook on the country's creditworthiness. That followed rival Standard & Poor's placement on Greece's rating, already the lowest in the eurozone, on watch for a possible downgrade.

No surprise there, given Greece's economic and budget crises, but Moody's Investors Service also outlined in a report conditions that could take down the triple-A ratings of the U.K. and U.S.

Even as Moody's cautioned over the long-term outlook for the U.S. credit rating, the dollar and Treasuries rallied in a renewed flight to quality and away from risk assets, such as stocks, palpably demonstrating the seriousness with which a downgrade in the United States' rating was taken. As one cynic noted, this was the same Moody's that readily handed out triple-A ratings on asset-backed securities backed by credit-card receivables and subprime mortgages.

Moody's also cut the ratings of six Dubai-linked issuers after determining that would be no "meaningful" government support for the likes of DP World. Meantime, Nakheel, the builder of Dubai's palm-shaped islands, was reported to have lost $3.65 billion.

Yet, even though oil-rich Abu Dhabi has not come to the rescue of debt-laden but resource-poor Dubai, the cost of insuring Abu Dhabi's debt in the credit-default swaps market shot higher by 10.31%, to 114.55 basis points ($145,550 annually for $10 million of debt for five years), according to CMA Vision, a unit of the CME Group.

Meantime, the cost of insuring Dubai's debt was 544.55 basis points, higher than other debt-stressed sovereign creditors such as Latvia and Iceland, at 396.67 basis points and 314.82 basis points, respectively. The only worse-off sovereign debtors were Pakistan (687.50 basis points), Argentina (1058.69), Ukraine (1350.96) and Venezuela (1305.43), according to CMA Vision.

As for the top-grade sovereign credits, Moody's said none of the 17 nations with triple-A ratings is in imminent danger of losing them. But, it added, the next two years will test whether their economic recoveries will be strong enough to support their debt loads. While the U.S. and the eurozone have reported increases in real gross domestic product, Moody's said the pace of recovery is unimpressive.

Moody's expressed optimism that the U.S. budget deficit would be reined in, helped by the quicker-than-expected repayment of funds disbursed under the Troubled Assets Relief Program. But the ink was hardly dry on Moody's report when President Obama Tuesday announced a new "jobs" program, funded at least in part by the greater-than-anticipated return of TARP funds.

Elsewhere, while the credit of the United States was getting increased scrutiny, Tim Backshall of CreditResearch.com observed marked widenings in the CDS of the states of Florida and California, while Moody's cut its rating on Illinois to single-A2 from single-A1.

As for the Golden State, CMA Vision ranks it No. 9 among the Top 10 sovereign credits most likely to default. Indeed, California's standing in the CDS market is just slightly worse than Kazakhstan's. Not very nice.

For the federal government, debt service expenses will exceed 10% of GDP by 2013, which by that criterion would move it out of triple-A territory into double-A, observes David Goldman, writing in the Inner Workings blog at Asia Times (www.atimes.com.)

But the U.K., France and Germany will be headed in the same downward direction. And the weak sisters of the eurozone -- Italy, Spain and the "prospective basket cases of Greece and Ireland" -- pose a problem for those looking to diversify out of dollar assets, Goldman points out. If you're an Asian central bank, where do you put your money?

If economies remain weak for the next couple of years, as Goldman expects, governments will have a tougher time funding their debt at today's extremely depressed rates, he says.

"This should be good for the dollar, and good for gold," he writes.

"Alternatives to the dollar will start to look worse, and alternatives to currencies (namely gold) will start to look better," Goldman concludes.

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