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Flurry of changes in sovereign ratings seen amid new rules

By Lucy Meakin

Regulations designed to restrict changes of opinion by credit-rating companies are triggering a flurry of rulings on euro-area nations as their year-end introduction approaches.

Standard & Poor’s stripped the Netherlands of its AAA status last week for the first time, while raising its grade for Cyprus and adjusting its outlook on Spain. Fitch Ratings raised its outlook on Spain’s BBB rating to stable from negative on Nov. 1, and Portugal’s outlook was revised to stable from negative by Moody’s Investors Service on Nov. 8. Moody’s also improved Greece’s ranking by two levels on Nov. 29.

While bond markets often disregard rating and outlook changes, action may pick up before year-end, according to HSBC Holdings Plc. The rating firms will have to publish announcement schedules for 2014 by the end of this month under European Union rules introduced in the wake of the region’s debt crisis. Assessors will be restricted to three judgments per year on sovereign borrowers that haven’t asked or paid for a grade, and will need to review ratings at least every six months.

“If you were contemplating a downgrade it might make you more inclined to act sooner rather than later in advance of the regulations coming in,” said Chris Attfield, a fixed-income strategist at HSBC in London. “Getting them in before Dec. 31 would probably be more convenient from their point of view.”

The yield on Dutch 10-year bonds was little changed at 2.03 percent on Nov. 29 after S&P cut its rating for the Netherlands to AA+, leaving Germany, Finland and Luxembourg as the only euro-area countries with a top grade at all three main rating companies. The extra yield investors get to hold the debt instead of German bunds, Europe’s benchmark government securities, stayed at 33 basis points.

The Dutch 10-year yield has dropped 55 basis points since S&P put the Netherlands on negative outlook in December 2011. The nation’s bonds returned 7.4 percent in the period through the end of last week, according to Bloomberg World Bond Indexes.

Euro-area sovereign rating changes have reduced in frequency since the height of region’s debt woes. In 2011 Moody’s, Fitch and S&P announced 47 rating cuts and increases of euro-area nations, compared with 18 changes this year.

“We’ve left the acute phase of the debt crisis behind,” said Marius Daheim, a senior fixed-income strategist at Bayerische Landesbank in Munich. “In that stage you saw rapid rating deteriorations for some countries and I think most of that is through and done. The potential market impact of rating changes has been reduced.”

S&P increased its grade for Cyprus to B- from CCC+ last week. The New York-based company also downgraded France by one step to AA in November. It has a track record cutting sovereign ratings before its peers, according to research by HSBC’s Attfield. After S&P downgraded France to AA+ from AAA in January 2012, Moody’s followed suit in November 2012 and Fitch Ratings did the same in July 2013.

Investors have often dismissed ratings actions. France’s 10-year bond yield is little changed since the day before the S&P downgrade on Nov. 8. It was at 2.16 percent as of 8:05 a.m. London time.

Spokesmen for S&P and Fitch had no immediate comment. Moody’s said in an e-mailed statement it doesn’t comment on “market rumors surrounding the timing of rating action.” Of the 18 ratings changes by those firms this year, four took place in the past month. The three companies cover about 95 percent of the world market between them with smaller firms making up the rest, according to the European Commission.

Under the EU rules, which came into force in June, the rating companies have to notify issuers of their new level at least one full working day before the announcement. Publication of sovereign ratings will only be allowed on Fridays, either after markets close, or at least one hour before trading starts in the EU. S&P’s action on Nov. 29 and its downgrade of France on Nov. 8 both happened on a Friday before markets opened.

Moody’s opted to announce its two-step upgrade to Greece’s credit rating on a Friday after the markets closed.

The country’s government bond rating was raised to Caa3 from C and given a stable outlook, Moody’s said in a statement. The ratings company said it expects Greece to “achieve (and possibly outperform) its target of a primary balance in 2013, and record a surplus in 2014.”

The limits on rating frequency only apply to sovereigns that have not requested a grade. Fifteen of 128 sovereign ratings at S&P, including Belgium, France, Italy and the Netherlands, are designated as “unsolicited,” according to the company’s website. Additional announcements, and deviations from the announced schedule may be allowed if the firms can justify their decisions to regulators.

“It’s hard to see how workable the new regulations will be,” said Richard McGuire, head of European rates strategy at Rabobank International in London. “If you were leaning towards making a rating change in the coming months it might be opportune to do so now. You have the flexibility to do so rather than having to wait until an appointed time.”

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