Eurozone Sovereign Rating Trends 2017

Among the 19 eurozone sovereigns, we rate 16 in the investment-grade category (‘BBB-‘ or above), while three–Portugal, Greece, and Cyprus–are speculative grade (‘BB+’ or below).

Over the past six months, we have raised the ratings on Cyprus (to ‘BB’ in September) and Malta (to ‘A-‘ in October). This extended a string of upgrades in the second half of 2015 (Netherlands, Spain, Cyprus, Portugal, Greece, and Slovakia) and the first half of 2016 (Greece and Slovenia). There have been no downgrades in the region in the past 18 months. The last downgrade was Greece, of a cumulative four notches during the first half of 2015, as its membership in the eurozone was openly questioned by its official creditors at the time. The last non-Greek sovereign downgrades in the eurozone were Finland and Italy in late 2014.

Consequently, the average eurozone sovereign rating as of December 2016 had recovered to just above ‘A’ from its low point of just above ‘A-‘ in June 2013. On a GDP-weighted basis, the average eurozone sovereign rating has bottomed out and is between ‘AA-‘ and ‘A+’.

With two positive and no negative outlooks in the eurozone currently, we believe that the trend of a mild overhang of upgrades over downgrades may have run its course and that average ratings will hover around current levels.

Following our upgrade of the Netherlands, there are currently three ‘AAA’ rated sovereigns in the eurozone (Germany, Luxembourg, and the Netherlands), compared with eight at the beginning of 2009 (Finland, France, Spain, Ireland, and Austria have since lost theirs).

Various key factors inform our sovereign ratings, according to our methodology. We assess these contributing factors as a strength, neutral, or weakness in relation to the universe of all sovereigns we rate globally, not with respect to the more limited sample of eurozone sovereigns alone.

One of the strongest factors supporting eurozone ratings is economic structure and growth, an assessment anchored in measurements of levels of prosperity. We assess this as a strength for nine sovereigns and neutral for 10. Greece and Cyprus notwithstanding, our ratings history still indicates that wealthy countries are less likely to default than lower and middle-income countries.

We assess all eurozone sovereigns’ institutional and governance effectiveness as either a strength or neutral (except for Greece); we also view monetary flexibility as either a strength or neutral for most eurozone sovereigns, reflecting the floating currency regime and the European Central Bank’s (ECB’s) very high credibility, which results in the euro being the second global reserve currency. Greece’s high public debt (the highest of all rated sovereigns in net terms as a percentage of GDP), and the pronounced disruption of the transmission mechanism, makes it once again the exception.

The divergence in our assessment of external strengths and weaknesses reflects the still-unresolved net external debt imbalances in the eurozone. That said, the share of sovereigns for which this is a strength is higher than those for which we assess it as weak. The latter includes those hardest hit by the crisis: Cyprus, Greece, and Portugal.

On the fiscal side, there is also a striking difference between stocks and flows. Fiscal flexibility and performance is strong or neutral for all sovereigns in the group, while eight out of the 19 sovereigns are still weak with relation to their debt burden.

During the second half of 2016 we adjusted the external assessment of Slovakia (lowering it to neutral from strength); raised the budgetary performance assessment on Belgium, Finland, and Portugal (to strength from neutral); and raised the fiscal debt assessment of Netherlands.