Egypt close to default and Bahrain one step away from junk bond status
- Published on Tuesday, 26 March 2013 08:43
- 2 Comments
The answer to the first question is no. Financial markets had plenty of early warning signs that something was coming up. As early as December 2011, Cyprus had a BBB investment grade rating by the major rating agencies. From there, it quickly went into junk territory (below BBB). Since the crisis in Greece in 2011, signs began to appear that Cyprus was having trouble too. Officials at the time made a point to say Cyprus was in good shape, even though it wasn’t. Last April, reports came out stating that Cyprus’s largest bank (the one that’s now defunct) will need a bailout. Early this year, the country’s new president made a point of saying he will swiftly address the economic needs of the country, but only one major newspaper pick up the fact that Cyprus will become the next Greece.
Source: S&P, Moody’s, Fitch.
BLUE = Investment Grade
YELLOW = Borderline, next step down is junk
ORANGE = Non-investment Grade (Junk)
RED = Highly risky and in or near defaultThings quickly change in the market. It took Cyprus only 15 months to go from investment grade to below junk. Blame this on rating agencies lagging the news and reality. If you can’t trust rating agencies to give you an accurate outlook on a sovereign or corporate bond, then how can you determine the risk of an investment and come up with a proper price? Though not a perfect science, one can look at current ratings and see which ones have been downgraded recently. Then take a closer look to see how quickly they are being downgraded. Countries and companies that are being downgraded fast are not headed for trouble, they are already in trouble regardless of whether they are still investment grade. Take a look at the table above and notice the ratings of the countries in the Middle East. Not all countries are rated, but we’ve listed all the countries in the Middle East and North Africa that have a rating. Next, take a look at the countries that are the highest rated. They are Kuwait, Qatar and the UAE, all three are rated AA, which is the highest for the region. Now take a look at the lowest rated. Egypt, Jordan and Lebanon are rated junk. Countries on the edge of falling into junk status include Bahrain, Morocco and Tunisia. Countries at risk of defaulting include Egypt and Pakistan. On the positive side, Turkey may soon be upgrade to investment grade. What are the chances of Bahrain being downgrade? It is highly likely, which will make it the first GCC country to achieve junk status. However, being downgraded to junk does not mean that the country is headed for default. Bahrain can easily avoid this, especially with support from other GCC nations. Egypt, on the other hand, is on the path of default. There are no signs so far that the country can avoid this fate. News continues to go from bad to worse in Egypt and the country is in desperate need to cash. See our earlier posts on Egypt, here, here and here. Don’t rely on government assurances or media reports stating that all is well and don’t rely on rating agencies to be up to date with the latest health report of a country.